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ARTICLES
U.S. TAX IMPERIALISM IN PUERTO RICO
DIANE LOURDES DICK *
This Article uses historical and legal analysis to demonstrate how U.S.
domination over Puerto Ricos tax and fiscal policies has been the centerpiece
of a colonial system and an especially destructive form of economic
imperialism. Specifically, this Article develops a novel theory of U.S. tax
imperialism in Puerto Rico, chronicling the sundry ways in which the United
States has used tax laws to exert economic dominance over its less developed
island colony. During the colonial period, U.S. officials wrote and revised
Puerto Rican tax laws to serve U.S. economic interests. In more recent years,
U.S. tax laws have disadvantaged Puerto Ricans, who still lack voting rights
and full democratic representation in Congress. A theory of tax imperialism
may also have application far beyond the U.S.-Puerto Rican experience. For
instance, it may help us understand the relationships between the United
States and its other possessions and territories throughout history, and between
the United Kingdom and its British Crown dependencies, overseas territories,
and newly-independent colonies.

* Associate Professor of Law, Seattle University School of Law. This Article was
selected for presentation at the Sixteenth Annual Yale/Stanford/Harvard Junior
Faculty Forum, held at Harvard Law School in June 2015. I owe a debt of gratitude
to Matt Autio, Steven A. Bank, Steven Bender, Rosa Carrasquillo, Brooke Coleman,
Keith Demirjian, Lourdes Dick, Sam Erman, Rafael Gely, Carmen Gonzalez, Lily
Kahng, Yair Listokin, Charlene Luke, Pedro Malavet, Omri Marian, Ajay Mehrotra,
Elizabeth Porter, Diane Ring, Victor Rodriguez, Darien Shanske, and Joseph
Thorndike for their helpful comments on earlier drafts. This Work has also
benefited tremendously from faculty workshop presentations at my home institution
as well as at the University of Utah S.J. Quinney College of Law, and from comments
received at the 2015 Northwest Junior Faculty Forum and the History and Fiscal
Policy Panel at the 2015 Annual Meeting of the Law and Society Association. This
Article was written in loving memory of my grandparents, Joaquin and Gloria Barros.

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TABLE OF CONTENTS
Introduction ............................................................................................ 2
I. A Theory of U.S. Tax Imperialism............................................. 12
II. Three Historical Stages of U.S. Tax Imperialism in Puerto Rico ... 16
A. Stage One of U.S. Tax Imperialism in Puerto Rico,
18981919 ............................................................................ 20
1. U.S. evaluation of Puerto Ricos extant system of
taxation ........................................................................... 21
2. U.S. adjustments to Puerto Ricos extant system
of taxation ...................................................................... 25
a. U.S. enforcement of tax laws in Puerto Rico.......... 36
3. Further U.S. refinements to Puerto Rican tax laws:
Property taxation ........................................................... 37
4. Further U.S. refinements to Puerto Rican tax laws:
Income taxation ............................................................. 42
5. Assessing the U.S. fiscal restructuring of Puerto Rico ..... 50
B. Stage Two of U.S. Tax Imperialism in Puerto Rico,
19201974 ............................................................................ 53
C. Stage Three of U.S. Tax Imperialism in Puerto Rico,
1975Present........................................................................ 68
D. Recent Fiscal Developments in Puerto Rico ...................... 78
III. A Broader Theory of Tax Imperialism: Possible Future
Applications, Points for Further Study ...................................... 83
Conclusion ............................................................................................ 84
INTRODUCTION
Today, Estado Libre Asociado de Puerto Rico (the Commonwealth
of Puerto Rico) 1 is financially and economically distressed; this much
1. See P.R. CONST. art. 1, 2 (establishing a republican form of government for
the U.S. territory); see also Act of July 3, 1952, Pub. L. No. 447, 66 Stat. 327
(approving the islands constitution, thereby giving it effect under federal law).
Puerto Rico is composed of three separate inhabited islands; however, it is
consistently referred to as the island. See, e.g., CSAR J. AYALA & RAFAEL BERNABE,
PUERTO RICO IN THE AMERICAN CENTURY: A HISTORY SINCE 1898 1 (2007) (using the
term the island to refer to Puerto Rico in a comprehensive account of the islands
relations with the United States); see also 48 U.S.C. 731 (2012) (applying [t]he
provisions of this chapter . . . to the island of Puerto Rico and to the adjacent islands
belonging to the United States and waters of those islands and declaring that the
name Puerto Rico . . . shall be held to include not only the island of that name, but

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is painfully clear. The Commonwealth struggles with weak economic


growth 2 while shouldering a heavy debt load. 3 In recent years,
prominent U.S. investment rating firms have repeatedly lowered
Puerto Ricos bond ratings to below junk status, signaling that the
Commonwealth may be unable to satisfy its obligations. 4 Defaults 5
are not just harmful to Puerto Rico itself; Puerto Rican government
bonds have been traded widely in U.S. capital markets for years.
Meanwhile, a legal fight is brewing regarding the islands right to
restructure its obligations. Although a federal court has thrown out a
new debt restructuring law 6 passed by the Legislative Assembly of
Puerto Rico in June 2014, 7 the island continues to push for an out-of-

all the adjacent islands).


2. See D. ANDREW AUSTIN, CONG. RESEARCH SERV., R44095, PUERTO RICOS
CURRENT FISCAL CHALLENGES 12 (2015), https://www.fas.org/sgp/crs/row/R44095.pdf.
3. See, e.g., Michelle Kaske, Puerto Rico Lawmakers Pass $2.9 Billion Bonding
Measure, BLOOMBERGBUSINESS (Dec. 9, 2014, 10:06 AM), http://www.bloomberg.com/
news/articles/2014-12-09/puerto-rico-lawmakers-pass-2-9-billion-debt-plan-with-ratecap (reporting that Puerto Ricos debt had reached approximately $73 billion in
December 2014).
4. See, e.g., Josh Beckerman, Standard & Poors Downgrades Puerto Rico: S&P Cuts
Puerto Ricos General Obligation Rating to Two Notches Below Investment Grade, WALL
STREET J. (July 11, 2014, 6:37 PM), http://www.wsj.com/articles/standard-poorsdowngrades-puerto-rico-1405117331 (explaining that Puerto Ricos lower general
obligation rating could indicate mounting economic and fiscal challenges for the
commonwealth as a whole); Irina Baron & Xian Li, Puerto Ricos Credit Risk Measures
Reach a Five-Year High, MOODYS ANALYTICS (June 30, 2014), https://www.moodys.com/
researchdocumentcontentpage.aspx?docid=PBC_172396 (reporting a one-year measure
of Puerto Ricos credit risk as higher than that of Argentina, Venezuela, and Ukraine).
5. The island defaulted for the first time in August 2015. Mary Williams Walsh, Puerto
Rico Defaults on Bond Payment, N.Y. TIMES (Aug. 3, 2015), http://www.nytimes.com/
2015/08/04/business/dealbook/puerto-rico-decides-to-skip-bond-payment.html.
6. 2014 P.R. Leyes 71.
7. See Franklin Cal. Tax-Free Tr. v. Puerto Rico, Nos. 15-1218, 15-1221, 15-1271,
15-1272, 2015 WL 4079422, at *1 (1st Cir. July 6, 2015) (affirming the
unconstitutionality of 2014 P.R. Leyes 71 because the U.S. Bankruptcy Code preempts Puerto Ricos law, and Puerto Rico lacks authority to authorize its
municipalities to pursue bankruptcy relief), petition for cert. filed, No. 15-233 (Aug. 24,
2015); see also Michael Corkery, Judge Strikes Down Puerto Ricos Debt Restructuring Law,
N.Y. TIMES (Feb. 8, 2015, 1:52 PM), http://dealbook.nytimes.com/2015/02/08/
judge-strikes-down-puerto-ricos-debt-restructuring-law (explaining that [i]nvestors
in billions of dollars of Puerto Rico bonds secured a major legal victory as a result of
the decision invalidating Puerto Ricos debt restructuring law).

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court restructuring 8 or, in the alternative, access to federal


bankruptcy protections that are normally granted to municipalities. 9
Scholars and journalists have compared the situation in Puerto
Rico to other emerging market financial shocks, such as the 1980s
Latin American debt crisis and the City of Detroits downward
economic spiral. 10 But the Puerto Rican experience is exceptional in
a number of ways. Puerto Rico is not a U.S. state or a political
subdivision thereof. 11 However, other nation-states do not recognize
Puerto Rico as being independent from the United States. 12 In
actuality, Puerto Rico is the largest unincorporated U.S. territory and is,
therefore, subject to U.S. federal laws and the plenary power of
Congress. 13 Puerto Rican citizens are U.S. citizens, 14 although they lack
8. See, e.g., Michelle Kaske, Puerto Rico Faces Higher Hurdles in Debt Restructuring Plan,
BLOOMBERGBUSINESS (Sept. 10, 2015, 3:00 AM), http://www.bloomberg.com/
news/articles/2015-09-10/puerto-rico-confronts-higher-hurdles-in-debt-restructuring-plan.
9. See Clayton P. Gillette & David A. Skeel Jr., How Congress Can Help Puerto Rico,
N.Y. TIMES (Sept. 14, 2015), http://www.nytimes.com/2015/09/14/opinion/howcongress-can-help-puerto-rico.html (discussing Puerto Ricos recent efforts to obtain
access to Chapter 9 bankruptcy protection).
10. See, e.g., FRANCISCO E. GONZLEZ, CREATIVE DESTRUCTION? 14 (2012)
(discussing the relationship between economic collapse and regime change from
observations of various Latin American countries); Errol Louis, Puerto Rico: Detroit of the
Caribbean, N.Y. DAILY NEWS (July 17, 2014, 4:30 AM), http://www.nydailynews.com/opinion/
puerto-rico-detroit-caribbean-article-1.1869561 (noting that Puerto Rico, the next
Detroit, holds $73 billion in debt, far surpassing its $9.6 billion annual budget).
11. However, Puerto Ricans have been debating the islands political future
(whether it will remain a U.S. territory, become a U.S. state, or gain full
independence) for several decades. See, e.g., Maryellen Tighe & Ellie Ismailidou,
Wall Street Waits While Statehood Debate Handcuffs Puerto Rico Decision Makers, FORBES
(July 7, 2014, 3:00 PM), http://www.forbes.com/sites/mergermarket/2014/07/07/
wall-street-waits-while-statehood-debate-handcuffs-puerto-rico-decision-makers
(explaining that dealing with the Commonwealths massive debt will affect the
outcome of the debate over Puerto Ricos statehood). See generally EDGARDO
MELNDEZ, PUERTO RICOS STATEHOOD MOVEMENT 110 (1988) (discussing the history
of the statehood movement in Puerto Rico, and its connection to national identity,
politics, and sociopolitical conflicts).
12. That said, the islands unique history and ethnic background have
contributed to Puerto Ricos adoption of its own distinct national identity. See JORGE
DUANY, THE PUERTO RICAN NATION ON THE MOVE: IDENTITIES ON THE ISLAND AND IN
THE UNITED STATES 911 (2002) (considering the multiple social actors that
contribute to the definition of Puerto Ricos national identity).
13. See U.S. CONST. art. IV, 3, cl. 2 (The Congress shall have Power to dispose
of and make all needful Rules and Regulations respecting the Territory or other
Property belonging to the United States . . . .).
14. See Jones-Shafroth Act, ch. 145, 39 Stat. 951, 953 (1917) (extending U.S.
citizenship to Puerto Ricans); see also 8 U.S.C. 1402 (2012) (codifying and clarifying
the extension of U.S. citizenship). However, Puerto Ricans do not enjoy all of the

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voting rights at the federal level and are represented in the U.S. House
of Representatives only by a non-voting Resident Commissioner. 15
Puerto Ricos ambiguous political status and historic lack of a
formal legal process for restructuring its public debts 16 are partly
responsible for a mounting crisis, which has inspired hand-wringing
and speculation on Wall Street. 17 For years, U.S. mainstream media
outlets have warned of a Puerto Rican default, which would cause
ripple effects for all U.S. investors. 18 Journalists have editorialized the
Commonwealths struggles from a variety of angles, such as by
recounting crime statistics in San Juans urban center 19 and citing the

rights and protections of the U.S. Constitution unless and until they set foot on the
mainland. See Balzac v. Porto Rico, 258 U.S. 298, 30405 (1922) (holding that
certain provisions of the U.S. Constitution do not apply to territories not
incorporated into the union).
15. See 48 U.S.C. 891 (2012) (outlining the election procedures and
responsibilities of the Puerto Rican Resident Commissioner); RULES OF THE HOUSE OF
REPRESENTATIVES, R. III, 114th Cong. (2015), http://clerk.house.gov/legislative/
house-rules.pdf (noting that the Resident Commissioner may not vote, but is
permitted to serve on committees and speak from the House floor).
16. Congress has the authority to enact uniform Laws on the subject of
Bankruptcies throughout the United States. U.S. CONST. art. I, 8, cl. 4. Most
recently, Congress adopted the Bankruptcy Reform Act of 1978, as amended,
codified in title 11 of the U.S. Code (the U.S. Bankruptcy Code). However,
bankruptcy relief under the U.S. Bankruptcy Code does not apply to the
Commonwealth of Puerto Rico or its public corporations. Puerto Rico attempted to
fill this void with a restructuring law, which was recently invalidated by a U.S. federal
court of appeals. See Corkery, supra note 7 and accompanying text (discussing the
law suit striking down Puerto Ricos restructuring law); see also Stephen J. Lubben,
Puerto Rico and the Bankruptcy Clause, 88 AM. BANKR. L.J. 553, 55355, 578 (2014)
(thoughtfully critiquing the constitutional challenges to Puerto Ricos attempts to
restructure its public debts).
17. See, e.g., Mary Childs & Michelle Kaske, Puerto Rico Distress Spells Wall Street
Opportunity:
Muni Credit, BLOOMBERGBUSINESS (Nov. 12, 2013, 12:01 AM),
http://www.bloomberg.com/news/articles/2013-11-12/puerto-rico-distress-spellswall-street-opportunity-muni-credit.
18. See, e.g., Michelle Kaske, Puerto Rico Debt Crisis: A Bond Guide as Potential
(Sept.
11,
2015,
4:35
PM),
Defaults
Loom,
BLOOMBERGBUSINESS
http://www.bloomberg.com/news/articles/2015-09-11/puerto-rico-debt-crisis-abond-guide-as-potential-defaults-loom; Jordan Weissmann, Here It Comes: Puerto Rico
Is Headed for a Debt Default, SLATE (July 31, 2015, 7:07 PM), http://www.slate.com/
blogs/moneybox/2015/07/31/puerto_rico_is_about_to_default_on_some_of_its_de
bt_what_happens_next.html.
19. See, e.g., Lizette Alvarez, Economy and Crime Spur New Puerto Rican Exodus, N.Y.
TIMES (Feb. 8, 2014), http://www.nytimes.com/2014/02/09/us/economy-andcrime-spur-new-puerto-rican-exodus.html (stating the primary reason Puerto Ricans
are migrating to the mainland is because of the high rate of violent crime); David
Greene, Dont Give Up On Us: Puerto Ricans Wrestle with High Crime, NPR (Feb. 7,

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migration of highly educated young people to the mainland. 20


Analysts have searched for someone or something to blame. Some
criticize Puerto Ricos governmental inefficiencies and crumbling
infrastructure. 21 Others suggest that public sector workers receive
overly generous retirement benefits and that Puerto Rico should
reform its pension system. 22
Other analysts focus on narrow aspects of U.S.-Puerto Rican
relations. For instance, some observers argue that highly technical
U.S. tax policiessuch as the now-repealed possessions tax credit that
had encouraged U.S. corporations to invest in Puerto Rico 23have

2013, 3:27 AM), http://www.npr.org/2013/02/07/171071473/-don-t-give-up-on-uspuerto-ricans-wrestle-with-high-crime (stating that Puerto Ricos murder rate is six
times that of the entire United States); Andrew OReilly, Plagued By Violence, Bad
Economy, Puerto Rico Rings in 2014 with Bang; 13 Murders in 5 Days, FOX NEWS LATINO
(Jan. 8, 2014), http://latino.foxnews.com/latino/news/2014/01/08/plagued-byviolence-bad-economy-puerto-rico-rings-in-2014-with-bang-13-murders (The burst of
murders in the first few days of the New Year indicates that Puerto Ricos homicide
rate, which reached a record high in 2011 of 1,130, remains high above the level of
the rest of the United States.).
20. See, e.g., Cindy Y. Rodriguez, Why More Puerto Ricans Are Living in Mainland
U.S. Than in Puerto Rico, CNN (Mar. 24, 2014), http://www.cnn.com/2014/03/22/
us/puerto-rico-migration-economy (explaining that many of the individuals
migrating from Puerto Rico are young, educated professionals who come to the
mainland in search of work); see also, DVera Cohn et al., Puerto Rican Population
Declines on Island, Grows on U.S. Mainland, PEW RES. CTR. (Aug. 11, 2014),
www.pewhispanic.org/2014/08/11/puerto-rican-population-declines-on-islandgrows-on-u-s-mainland (stating that as of 2006, more Puerto Ricans reside on the U.S.
mainland than on the island).
21. See, e.g., Simone Baribeau, Puerto Ricos Public Relations Headache, FORBES (July
28, 2014, 12:13 PM), http://www.forbes.com/sites/mergermarket/2014/07/28/
puerto-ricos-public-relations-headache (critiquing Puerto Ricos management of
investor relations during the debt crisis); Tighe & Ismailidou, supra note 11
(claiming that Puerto Rican officials have been so distracted by the statehood debate
that they have failed to institute sound economic policies).
22. See, e.g., Lisa Lambert, Puerto Rico Court Strikes Down Teacher Pension Overhaul,
REUTERS (Apr. 11, 2014, 8:05 PM), http://www.reuters.com/article/2014/04/12/
puertorico-pensions-idUSL2N0N325N20140412 (Wall Street rating agencies had
said Puerto Ricos pension reforms were essential to improving the territorys
deteriorating credit quality.); see also Ted Dabrowski, Lessons from Puerto Rico: The Problem
with Big Pension Debts and Little Solutions, ILL. POLY (Mar. 31, 2013),
https://www.illinoispolicy.org/lessons-from-puerto-rico-the-problem-with-big-pensiondebts-and-little-solutions (arguing that Puerto Ricos fiscal crisis demonstrates why
public employers must move away from defined benefit pension plans, in favor of
defined contribution pension plans).
23. See infra Section II.C (outlining the history of tax benefits received by
corporations doing business in Puerto Rico and the effects they had on the
Commonwealths economy).

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propped up the islands economy for decades. According to these


observers, the United States attempted to stimulate American
investment in Puerto Rico and improve economic opportunity on the
island. 24 Then, as the U.S. government scaled back these initiatives
most notably by phasing out the possessions tax credit between 1996
and 2006Puerto Rico increasingly turned to the debt markets to
fund general obligations. 25 Most accounts like these further note that
Puerto Rico has been able to borrow heavily at below-market interest
rates because its bonds are exempt from U.S. federal, state, and local
taxes. 26 And, of course, some commentators are quick to point out
that Puerto Rican residents do not have to pay federal income tax,
although they benefit from many federal aid programs. 27
These narratives consistently portray U.S. policies as generous and
benevolent compared to Puerto Rican tax and economic policies,
which are portrayed as grasping and even guileful. Some observers
suggest that, in recent years, Puerto Rico has refused to institute
necessary austerity measures, instead choosing to reinvent itself as a tax
haven for wealthy mainland residents in an attempt to lure American
capital to the island and deprive Uncle Sam of his rightful due. 28

24. See, e.g., Mark Nestmann, Is Puerto Rico the Perfect Tax Haven for US Citizens?,
ECON. POLY J. (May 7, 2014), http://www.economicpolicyjournal.com/2014/05/ispuerto-rico-perfect-tax-haven-for-us.html (writing that Congress had tried direct aid,
industrial incentives, and tax breaks to revive Puerto Ricos economy over the
course of three decades).
25. See, e.g., Louis, supra note 10 (explaining that [t]he economic storm now
engulfing the island began in 1996, when the Clinton administration began a 10-year
phaseout of [s]ection 936, a tax program that had allowed companies to take tax-free
profits from operations based in Puerto Rico).
26. See infra note 273 and accompanying text (discussing the Jones-Shafroth
Act and noting that Puerto Rican government bonds are exempted from federal,
state, and county taxes).
27. See, e.g., ALEXANDER ODISHELIDZE & ARTHUR LAFFER, PAY TO THE ORDER OF
PUERTO RICO 61 (2004) (The heart of the imbalance consists in this: while, for the
purposes of most programs that tap the federal Treasury, Puerto Ricans operate like
other American citizens and receive benefits, the people of the island do not pay
federal income tax.). For an example of a federal aid program, see FEMA, President
Declares Major Disaster for the Commonwealth of Puerto Rico, HQ-10-209 (2010),
https://www.fema.gov/news-release/2010/10/26/president-declares-major-disastercommonwealth-puerto-rico.
28. See, e.g., Katherine Burton, Puerto Rico: Tropical Tax Haven for Americas SuperRich, BUSINESSWEEK (June 26, 2014), http://www.bloomberg.com/bw/articles/201406-26/puerto-rico-tax-haven-for-americas-super-rich (describing a law that allows
Americans to pay minimal or no local or federal capital gains taxes as long as they
live in Puerto Rico for at least 183 days a year, and no local taxes on dividend or
interest income for twenty years).

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Indeed, a recent highly-publicized report by a U.S. tax expert accused


Puerto Rico of helping itself to a seemingly back-door bailout from the
U.S. Treasury in the form of ever-increasing corporate taxes that can be
credited by U.S. firms against their federal income tax liabilities. 29 In
response, some analysts wonder when the United States will finally grow
tired of supporting its neer-do-well stepchild in the Caribbean. 30
The dominant account of Puerto Ricos contemporary economic
condition strongly implies that the island has never been able to
stand on its own, even with ample support from the U.S. Treasury
In essence, Puerto Rico is
and American capital markets. 31
characterized as an undisciplined and highly dependent island
economy that has made little use of generous U.S. tax and economic
incentives to become self-sufficient. Critics accuse the Puerto Rican
government of taking the easy way out, mostly by accepting large
federal transfers and racking up cheap debt from U.S. creditors to
fund a bloated public sector that enjoys a lavish tropical lifestyle. 32 By
29. Martin A. Sullivan, Economic Analysis: The Treasury Bailout of Puerto Rico,
TAXANALYSTS (Jan. 27, 2014), http://www.taxanalysts.com/www/features.nsf/
Features/1F974381895173AC85257C6D005F0128?OpenDocument.
30. See Jim McTague, Puerto Ricos Bleak Options, BARRONS (July 12, 2014, 2:37 AM),
http://www.barrons.com/articles/SB500014240531119036841045800152339722455
68 (describing any potential U.S. government bailout of Puerto Rico as tossing
greenbacks at fiscally irresponsible communities and comparing the situation in
Puerto Rico to the Mexican-American border crisis, cynically suggesting that
residents move en masse to the mainlandproducing the type of humanitarian
crisis Obama would toss money at); Louis, supra note 10 (noting the irresponsibility
of the islands political leaders and their Wall Street enablers as an important factor
in the current economic crisis).
31. See, e.g., Lisa Lerer, Obama Economic Advisory Team Said to Aid Puerto Rico,
BLOOMBERG (Nov. 20, 2013, 6:26 PM), http://www.bloomberg.com/news/articles/
2013-11-20/obama-economic-advisory-team-said-to-aid-puerto-rico-on-f (describing a
U.S. government dispatch of financial advisors to provide fiscal management advice
and suggesting that ongoing U.S. assistance has taken many forms).
32. See, e.g., Buying on Credit Is So Nice, ECONOMIST (Nov. 23, 2013),
http://www.economist.com/node/21590501 (referencing a song from West Side
Storya Broadway musical portraying Puerto Ricans in New York Cityin the title,
and beginning with a description of Puerto Ricos bustling Plaza Las Americas mall,
suggesting that Puerto Ricans spend freely while the government slides deeper into
insolvency); see also Mary Anastasia OGrady, Puerto Ricos Borrowing Bubble Pops, WALL
STREET J. (July 6, 2014, 6:04 PM), http://www.wsj.com/articles/mary-ogrady-puertoricos-borrowing-bubble-pops-1404684277 (describing Puerto Rico as a biggovernment paradise . . . running out of other peoples money and comparable to a
drug addict: high on cheap money from American creditors).
Such accounts implicitly and even explicitly adopt tired stereotypes of Latinos:
shopping excessively on credit, anxious to maintain a sensual image, with little
ambition to build and sustain successful enterprises. See generally, e.g., CHARLES

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pursuing an unwise and unsustainable course, critics argue, the island


has brought fiscal ruin unto itself; by holding itself out as a tax haven,
Puerto Rico has now turned against its most generous benefactor.
Notwithstanding these enduring discourses on U.S. goodwill and
patriarchy, history suggests a very different explanation. Puerto Rico
has not simply chosen to shirk in the face of steadfast U.S. assistance;
rather, the Commonwealths present difficulties are the result of
more than a century of expansionary fiscal and monetary U.S.
policies. Early in U.S.-Puerto Rican relations, U.S. officials rewrote
Puerto Rican tax laws to serve U.S. economic interests. In more
recent years, U.S. tax laws reflecting mainland economic interests
have been imposed on Puerto Ricans, who lack voting rights and full,
democratic representation in the U.S. Congress. 33 In essence, the
United States has, for more than one hundred years, practiced an
understudied form of economic imperialism in Puerto Rico. The
United States has used tax laws to advance U.S. corporate interests,
deny Puerto Ricos economic and political self-determination, and
cripple Puerto Rican enterprise. Consequently, the island still has
difficulty raising revenue through taxation; it has generated
significant operating deficits and has borrowed heavily to perform
critical government functions.
To be sure, not all of the harmful tax and economic policies
imposed by the United States reflect deliberate attempts to promote
mainland economic interests at the expense of Puerto Rican growth.
The story of U.S. involvement in Puerto Rico is far more nuanced.
Some laws and policies were motivated, in whole or in part, by white
paternalism and other forms of racism. 34 At other times, the United
RAMREZ BERG, LATINO IMAGES IN FILM: STEREOTYPES, SUBVERSION, AND RESISTANCE 81
82 (2002) (addressing the highly offensive and persistent stereotype of the lazy
Latino); STEPHANIE GRECO LARSON, MEDIA & MINORITIES: THE POLITICS OF RACE IN
NEWS AND ENTERTAINMENT 6062 (2006) (discussing common stereotypes of Latina
women in mainstream film and media); Cynthia Kwei Yung Lee, Race and Self-Defense:
Toward a Normative Conception of Reasonableness, in CRITICAL RACE THEORY: THE
CUTTING EDGE (Jean Stefancic, ed., 2d ed. 2000) (discussing Latino stereotypes
broadly, and their undertreatment in legal scholarship). But see generally Dania
Alexandrino, Study: Puerto Ricos Children Mired in Poverty That Dwarfs Rest of U.S.,
CNN (Aug. 1, 2012), http://www.cnn.com/2012/08/01/us/puerto-rico-childpoverty (reporting that, contrary to the assumption of a lavish lifestyle on the island,
many Puerto Ricans, including eighty percent of Puerto Rican children, live in poverty).
33. See supra note 15 and accompanying text (describing the islands limited right
to participate in Congress via its Resident Commissioner).
34. See infra notes 27382 and accompanying text (providing specific examples of
Senator Vardamans racist commentary regarding U.S. citizenship for Puerto Ricans
and a triple tax exemption for Puerto Rican government bonds).

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States simply acted with indifference, paying little attention to the


economic effects of its laws and policies on Puerto Rican
development. 35 But regardless of the specific motivations, the
primarily self-interested tax laws put into place by the United States
with respect to the captive and disenfranchised island territory have
had the cumulative effect of leaving Puerto Rico financially and
economically crippled. Considering that the Founding Fathers chief
grievance with Great Britain concerned the imposition of tax laws
that were detrimental to the interests of the American colonies, 36 our
subsequent interventions in Puerto Ricowhether driven by malice,
greed, neglect, or indifferenceare especially disquieting. In this
way, this Article joins a chorus of scholars, 37 literary figures, 38 political
35. See infra notes 32932 and accompanying text (noting other motivating
factors behind U.S. policy decisions unrelated to Puerto Rico).
36. See generally CHARLES ADAMS, FOR GOOD AND EVIL: THE IMPACT OF TAXES ON
THE COURSE OF CIVILIZATION 297306 (1st ed. 1993) (outlining colonial Americas
view on taxes from 1765 to 1778); HENRY M. GLADNEY, NO TAXATION WITHOUT
REPRESENTATION: 1768 PETITION, MEMORIAL, AND REMONSTRANCE 14 (2014).
37. See generally LAURA BRIGGS, REPRODUCING EMPIRE: RACE, SEX, SCIENCE, AND U.S.
IMPERIALISM IN PUERTO RICO (2002) (exploring U.S. imperialism in Puerto Rico
through racial as well as sex-related discourses, including sexuality, reproductive
patterns, and family arrangements); COLONIAL DILEMMA: CRITICAL PERSPECTIVES ON
CONTEMPORARY PUERTO RICO (Edwin Melndez & Edgardo Melndez eds., 1993)
(situating modern political and economic conflicts in Puerto Rico within a broader
neocolonial context); PEDRO A. MALAVET, AMERICAS COLONY: THE POLITICAL AND
CULTURAL CONFLICT BETWEEN THE UNITED STATES AND PUERTO RICO (2004)
(critiquing U.S. imperialism in Puerto Rico and thoughtfully analyzing alternatives to
its present colonial status); JOS TRAS MONGE, PUERTO RICO: THE TRIALS OF THE
OLDEST COLONY IN THE WORLD (1999) (arguing for liberation of the island colony
from American oversight based on his experiences as Puerto Ricos Attorney General
and its Supreme Court Chief Justice); EFRN RIVERA RAMOS, THE LEGAL
CONSTRUCTION OF IDENTITY: THE JUDICIAL AND SOCIAL LEGACY OF AMERICAN
COLONIALISM IN PUERTO RICO (2001) (detailing the role of the American judicial
system in advancing U.S. imperial goals in Puerto Rico); Jos Julin AlvarezGonzlez, Law, Language and Statehood: The Role of English in the Great State of Puerto
Rico, 17 LAW & INEQ. 359, 36061 (1999) (considering the role of language in
restraining Puerto Ricos right to self-determination); Ediberto Romn, Empire
Forgotten: The United Statess Colonization of Puerto Rico, 42 VILL. L. REV. 1119, 112026
(1997) (contrasting purported U.S. commitments to human rights and selfgovernance, on the one hand, with its colonization of Puerto Rico, on the other).
38. See, e.g., JESS COLN, THE WAY IT WAS AND OTHER WRITINGS 71 (1993)
(decrying U.S. imperialism in Puerto Rico and its accompanying agricultural slavery,
monoculture, absenteeism and rank human exploitation); LUIS RAFAEL SNCHEZ, LA
GUARACHA DEL MACHO CAMACHO (1976) (confronting U.S. cultural imperialism);
ESMERALDA SANTIAGO, WHEN I WAS PUERTO RICAN 6383 (1993) (offering a subtle
critique of the U.S. colonization of the island nation through public health and
educational outreach initiatives).

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activists, 39 and other Puerto Rican and mainland critics 40 who have
denounced the indefensible and unjust nature of U.S. interventions in
Puerto Rico. To this rich body of work, this Article contributes historical
and legal analysis, demonstrating precisely how U.S. domination over
the islands tax and fiscal policies has been the centerpiece of a colonial
system and an especially destructive form of economic imperialism. 41
As a case study, the Puerto Rican story demonstrates how systems of
taxation can facilitate a more complex, broader pattern of economic
subordination. It reveals how more powerful governments are able to
use tax laws to not only redistribute wealth within their own
boundaries, but to also redirect the flow of capital globally in order to
help large corporations fulfill their manifest destiny. Such policies
have the effect of enriching corporate and financial interests at the
expense of developing economies. The implications are not only
relevant to the study of U.S.-Puerto Rican relations; they shed new
light upon the dealings of more powerful governments and the
taxing jurisdictions they have been able to dominatewhether by
political right, or by cultural, military, or socio-economic fiat. In
particular, the analysis may help us to understand the relationships
between the United States and its other possessions and territories
throughout history, 42 and between other imperial rulers and their
colonies, such as the United Kingdom and its British Crown

39. See, e.g., ALFREDO LPEZ, DOA LICHAS ISLAND: MODERN COLONIALISM IN
PUERTO RICO 17 (1987) (exploring the negative effects of U.S. colonialism in Puerto
Rico and on the mainland); see also, e.g., JOS DE DIEGO, NUEVAS CAMPAAS:
INDEPENDENCIA DE PUERTO RICO UNIN ANTILLANA SOLIDARIDAD IBERO-AMERICANA
(1916) (urging the Puerto Rican people to resist the influence of the United States and
preserve their national identity); VICENTE BALBS CAP, PUERTO RICO A LOS DIEZ AOS DE
AMERICANIZACION (1910) (opposing U.S. political and economic control in Puerto Rico).
40. For example, the legendary Puerto Rican composer, Rafael Hernndez
Marn, lamented the tyrant who rules Puerto Rico in his 1937 song, Preciosa. See
Precious, LYRICS TRANSLATE, http://lyricstranslate.com/en/preciosa-precious.html
(last visited Oct. 26, 2015); see also Jos Luis Gonzalez, The Lamento Borincano, in
BORICUAS: INFLUENTIAL PUERTO RICAN WRITINGSAN ANTHOLOGY 4849 (Roberto
Santiago ed., 1995) [hereinafter BORICUAS] (describing the messages of political
protest that are reflected in Hernndez Marns work).
41. See Victor M. Rodriguez, Puerto Rico and Wall Streets 21st Century Debt Peonage
Imperialism, COUNTERPUNCH (Feb. 19, 2014), http://www.counterpunch.org/2014/02/19/
puerto-rico-and-wall-streets-21st-century-debt-peonage-imperialism (arguing, similarly, that U.S.
tax policies in Puerto Rico have had damaging long-term effects on the local economy).
42. See generally Bruce Leiserowitz, Coordination of Taxation between the United States
and Guam, 1 INTL TAX & BUS. LAW 218 (1983) (observing similar patterns with
respect to U.S. tax policies in Guam). Such a theory might also be relevant to states
that were initially annexed as territories.

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dependencies, overseas territories, and newly-independent colonies.


Of course, tax imperialism and other forms of economic
subordination are by no means creatures of the past or limited to
situations of quasi-colonial territorial control: they are features of
North-South relations that remain ubiquitous. 43 Thus, there is much
to learn from the Puerto Rican experience.
This Article proceeds in three parts. Part I introduces the concept
of tax imperialism and situates it within the broader literature on
economic imperialism. Part II engages in a robust historical and
legal analysis to construct a detailed account of U.S.-Puerto Rican
political and economic relations. Specifically, this Part focuses on the
major U.S. tax and economic policies that have impacted Puerto
Rican development, identifying in the process three distinct stages of
U.S. tax imperialism with respect to the island. Part III considers the
ways in which a more broadly applicable theory of tax imperialism
might help us to understand the complex relationships between more
and less powerful taxing authorities. This Article concludes by stressing
the need for Puerto Rican economic self-sufficiency in the future.
I.

A THEORY OF U.S. TAX IMPERIALISM

Imperialism is generally defined as an ongoing process of


aggressive state action to exert control over another nation. 44
Throughout history, states have used military intervention to achieve
such control. But in the modern age of neocolonialism, states have
used less formal, but nonetheless invasive, mechanisms to gain
influence over target nations cultural, economic, and legal affairs.45 As
dependency theory underscores in its rejection of modernization theory,46
43. For a detailed discussion of economic policies that have negatively impacted
the global South, see generally JOSEPH E. STIGLITZ, GLOBALIZATION AND ITS
DISCONTENTS (2002).
44. See generally, e.g., J.A. HOBSON, IMPERIALISM: A STUDY (5th ed. Ann Arbor ed.,
1978) (explaining in detail imperialism and its history); VLADIMIR I. LENIN,
IMPERIALISM, THE HIGHEST STAGE OF CAPITALISM (1917) (critiquing imperialism).
45. See, e.g., JEAN-PAUL SARTRE, COLONIALISM AND NEOCOLONIALISM 115 (Azzedine
Haddour et al. trans., 2001) (setting forth Sartres analysis of colonialism and
neocolonialism, and arguments for decolonization).
46. See DAVID E. APTER, RETHINKING DEVELOPMENT: MODERNIZATION, DEPENDENCY,
AND POSTMODERN POLITICS 711 (1987) (explaining modernization theory, and
arguing that it is important despite being a confusing and constantly changing
concept); see also Rumu Sarkar, Critical Essay: Theoretical Foundations in Development
Law: A Reconciliation of Opposites?, 33 DENV. J. INTL L. & POLY 367, 36768 (2005)
(acknowledging the historical tensions between modernization theory and
dependency theory); Jane Kaufman Winn, Book Review, How to Make Poor Countries

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blame for the plight of developing nations ought to be assigned to the


powerful states, whose imperialist interventions create dependencies. 47
Classic works in the social sciences reveal how powerful states, such
as the United States, exert control over weaker states in order to
extract resources and advance their own economic interests.
Scholarship has focused on economic imperialisms negative effects
on labor and infrastructure within developing regions, 48 and on the
role of states, multinational corporations, nongovernmental
organizations, and other actors in advancing the interests of powerful
regimes. 49 Drawing upon the closely-related world systems theory, 50
these works tend to show that imperialism by its very nature poorly
integrates developing nations into the global market, leaving them
suspended in a state of dependency, with only a peripheral role to
play in the world economy. 51

Rich and How to Enrich Our Poor, 77 IOWA L. REV. 899, 908 (1992) (reviewing
HERNANDO DE SOTO, THE OTHER PATH (1987)) (explaining that dependency theory
reasons that Latin American nations economies have failed because development
has been twisted toward the interests of a small number of local businesses and the
multinational corporations with whom they cooperate instead of toward the
common good of the nation).
47. See, e.g., FERNANDO HENRIQUE CARDOSO & ENZO FALETTO, DEPENDENCY AND
DEVELOPMENT IN LATIN AMERICA 17 (1979) (arguing that Northern pressures toward
modernization caused several South American countries economies to fail during
the mid-twentieth century).
48. See, e.g., Andre Gunder Frank, The Development of Underdevelopment, MONTHLY
REV., Sept. 1966, at 17 (arguing that the expansion of capitalism has generated
underdevelopment in some parts of the world while spurring economic development
in others); Arno Tausch, Social Cohesion, Sustainable Development and Turkeys Accession
to the European Union: Implications from a Global Model, 2 TURKISH J. INTL REL. 1, 13
(2003) (highlighting that income distribution around the world has worsened with
globalization); see also Tayyab Mahmud, Migration, Identity, & the Colonial Encounter,
76 OR. L. REV. 633, 63435 (1997) (categorizing migration as one collateral
consequence of imperial rule).
49. See generally MORAL IMPERIALISM: A CRITICAL ANTHOLOGY (Berta Esperanza
Hernndez-Truyol ed., 2002) (containing numerous essays that explore these themes).
50. See Immanuel Wallerstein, The Rise and Future Demise of the World Capitalist
System: Concepts for Comparative Analysis, 16 COMP. STUD. SOCY & HIST. 387, 390 (1974)
(describing world systems as . . . unit[s] with a single division of labor and multiple
cultural systems, and reasoning that there can be two types: world systems with a
common political system, and those without); Winn, supra note 46, at 908
(explaining that world systems theory divides the world into core and peripheral
areas and argues that economic relations between core and peripheral areas are
formed on terms that favor only the core areas).
51. See generally Francis G. Snyder, Law and Development in the Light of Dependency
Theory, 14 LAW & SOCY REV. 723 (1980) (suggesting, tentatively, that research on law
in undeveloped countries should elaborate on Marxist theories of law); Winn, supra note

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At the same time, a fundamental limitation of dependency theory


has been its general unwillingness to seriously consider laws as the
primary method of achieving imperialist ends. 52 Dependency theory
has also attracted a number of other criticisms. Some argue that the
theory neglects to explain the ostensible economic growth and
industrial development that has taken place throughout much of the
developing world, including within regions that were once
colonized. 53 Others assert that, in assigning blame to the dominant
state, the theory also fails to take into account the role of factors
unique to the subordinated one, such as quality and quantity of natural
resources, the nature of the prevailing political and economic culture,
and levels of education. 54 In essence, critics argue that the theory
focuses too much upon the dyadic relations between nations. 55
While modern works in economics, history, sociology, political
science, and law increasingly blend dependency theory with a more
thoughtful critique of factors specific to each developing nation,
there continues to be a relative dearth of scholarship identifying the
precise legal mechanisms that create and regulate economic
dependencies. 56 Even less attention has been given to the use of tax
lawsof both the dominant state and the target nationto achieve
economic imperialistic ends. 57 Nevertheless, as evidenced by the so46, at 908 (explaining the linkages between dependency theory and world systems theory).
52. See Sarkar, supra note 46, at 373 (stating that dependency theorists consider
law secondary to economics because of Marxs theory that law constitutes the
superstructure to the underlying structure of economics). But see generally ASSAF
LIKHOVSKI, LAW AND IDENTITY IN MANDATE PALESTINE (2006) (exploring laws as
instruments of British power in mandate Palestine).
53. Snyder, supra note 51, at 734.
54. See, e.g., James Thuo Gathii, Retelling Good Governance Narratives on Africas
Economic and Political Predicaments: Continuities and Discontinuities in Legal Outcomes Between
Markets and States, 45 VILL. L. REV. 971, 996 (2000) (critiquing traditional dependency theory
by pointing out the flaw that the influence of outside control as the source of problems in
Africa was unduly overstated, while internal issues were unduly trivialized).
55. Harriet Friedmann & Jack Wayne, Dependency Theory: A Critique, 2 CAN. J. SOC.
399, 402 (1977).
56. But see Carmen G. Gonzalez, An Environmental Justice Critique of Comparative
Advantage: Indigenous Peoples, Trade Policy, and the Mexican Neoliberal Economic Reforms,
32 U. PA. J. INTL L. 723, 74655 (2011) (examining the impact of the North
American Free Trade Agreement, and of International Monetary Fund and World
Bank structural adjustment policies, on Mexico).
57. Notable recent exceptions include LEIGH A. GARDNER, TAXING COLONIAL
AFRICA: THE POLITICAL ECONOMY OF BRITISH IMPERIALISM (2012), ALVIN RABUSHKA,
TAXATION IN COLONIAL AMERICA (2008), and Assaf Likhovski, Is Tax Law Culturally
Specific? Lessons from the History of Income Tax Law in Mandatory Palestine, 11
THEORETICAL INQUIRIES L. 725 (2010).

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called Shoup missions to reconstruct tax laws inamong other


placesFrance, Cuba, and post-World War II Japan, U.S.
representatives have directly participated in drafting internal revenue
codes around the globe. 58 Meanwhile, the U.S. Tax Code 59 itself
continues to exert undeniable influence over the investment
decisions of U.S. firms and their counterparts in developing
nations. 60 Further compounding matters, the United States wields
considerable power over the international tax coordination activities
of prominent nongovernmental organizations. 61 Yet, scholars still do
not completely understand the nature and extent of U.S. influence
over other taxing jurisdictions; nor do we fully comprehend the
collateral and direct consequences of the countless historical and
ongoing intrusions. By focusing on a particularly rich case study, this
Article helps to fill this void in the social science and legal literature,
tackling questions that demand equal parts rigorous tax analysis and
deep understanding of U.S. and Puerto Rican history.
The following sections develop a theory of U.S. tax imperialism,62
using U.S.-Puerto Rican relations throughout history to demonstrate
58. See generally THE POLITICAL ECONOMY OF TRANSNATIONAL TAX REFORM: THE
SHOUP MISSION TO JAPAN IN HISTORICAL CONTEXT (W. Elliot Brownlee et al. eds.,
2013) (discussing the development of the U.S. tax reform initiative); W. Elliot
Brownlee, The Shoup Mission to Japan: Two Political Economies Intersect, in THE NEW
FISCAL SOCIOLOGY: TAXATION IN COMPARATIVE AND HISTORICAL PERSPECTIVE 237, 240
43 (Isaac William Martin et al. eds., 2009).
59. All references herein to the U.S. Tax Code are to the Internal Revenue Code
of 1986 (codified as amended at 26 U.S.C. (2012)).
60. Robert Hellawell, United States Income Taxation and Less Developed Countries: A
Critical Appraisal, 66 COLUM. L. REV. 1393, 1423 (1966) (discussing U.S. Tax Code
provisions that reward businesses for investing in less-developed countries, while
doing little to help those countries).
61. See, e.g., Yariv Brauner & Miranda Stewart, Introduction: Tax, Law and
Development, in TAX, LAW AND DEVELOPMENT 3, 9 (Yariv Brauner & Miranda Stewart
eds., 2013) (cautioning that international tax coordination often leads to tragic
economic and tax policy choices by developing nations); Allison Christians,
Sovereignty, Taxation and Social Contract, 18 MINN. J. INTL L. 99, 99 (2009)
(considering the rising influence of non-governmental organizations, such as the
Organization for Economic Cooperation and Development, in coordinating tax
policies across international jurisdictions).
62. The phrase tax imperialism has been used in recent years by academics and
journalists to critique taxation of citizens worldwide income. See, e.g., Bernard
Schneider, The End of Taxation Without End: A New Tax Regime for U.S. Expatriates, 32
VA. TAX REV. 1, 53 (2012) (defining tax imperialism as the worldwide taxation of
nonresidents); Jeffrey Goldfarb, U.S. Should Scale Back Tax Imperialism, CNN (Oct. 7, 2009,
12:28 PM), http://money.cnn.com/2009/10/07/pf/taxes/obama_international_taxes
.breakingviews. However, this Article uses the phrase to refer to a much more
specific historical phenomenon.

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how the United States has used tax laws to exert economic
dominance over the island. The United States engaged in three
distinct stages of tax imperialism in Puerto Rico. In stage one, which
lasted from 1898 through 1919, the United States evaluatedand
ultimately dismantledPuerto Ricos extant system of taxation,
which was itself an instrument of Spanish colonial rule, constructing
in its place an entirely new system. This fiscal reconstruction was not
carried out simply to remedy injustices, increase revenues, and
stimulate Puerto Rican enterprise; rather, the changes were
calculated to provide an ideal environment for large U.S.
corporations doing business on the island. In stage two, which
extended from 1920 through 1974, the United States promulgated,
maintained, and encouraged tax and economic policies that
designated the island as a lower-cost provider of manufacturing
inputs used to improve the global competitiveness of U.S.
corporations. In stage three, which commenced in 1975 and
continues to the present day, the United States has struggled to
defend its corporate tax base and regain control over large
accumulations of American capital in Puerto Rico. As international
capital markets have rapidly developed and expanded, and as
corporate tax planning methods have grown more sophisticated, tax
policies have abruptly shifted. Current U.S. policies reflect a new
emphasis on facilitating the free flow of U.S. corporate wealth from
Puerto Rico back into the United States, and on impeding large-scale
outflow of capital from Puerto Rico to burgeoning international tax haven
countries. The following Part provides a detailed account of each of these
stages, constructing in the process a model of tax imperialism that is
potentially applicable far beyond the U.S.-Puerto Rican experience.
II. THREE HISTORICAL STAGES OF U.S. TAX IMPERIALISM IN PUERTO RICO
The analysis necessarily begins with a review of the earliest days of
U.S. dominance over Puerto Rico. Spain possessed Puerto Rico from
the early-sixteenth century until the conclusion of the SpanishAmerican War in 1898. 63 For the United States, the acquisition of
Puerto Rico was economically and strategically valuable, particularly in
light of the then increasing interest in tropical goods. 64 The island had
63. See LPEZ, supra note 39, at 928 (describing Puerto Ricos Spanish colonial
history); Treaty of Peace, U.S.-Spain, art. II, Dec. 10, 1898, 30 Stat. 1754 [hereinafter
Treaty of Paris] (transferring Puerto Rico from Spain to the United States).
64. O. P. Austin, Our Trade with Hawaii and Porto Rico, 19 ANNALS AM. ACAD. POL.
& SOC. SCI. 377, 377 (1902).

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the potential to serve as both a lower-cost provider of raw materials and


as a site for future U.S. naval ports. As one observer explained:
The United States buys from abroad every day of the year a million
dollars worth of tropical products, and if it can buy these or any
considerable part of them in its own territory, it will benefit not only
the population of that territory, but incidentally the people of the
United States, whose capital is or may be invested in the new fields, as
well as the great manufacturing and producing elements of our
community[,] by opening an increased market for our products. 65

In the late-nineteenth and early-twentieth centuries, the sugar


industry was an especially important global business that relied upon
access to tropical products. 66 Those who owned the means of
growing, refining, and trading in cane sugar were some of the
wealthiest and most politically powerful persons of the day. 67 However,
because U.S. refineries imported large amounts of raw and partially
refined cane sugar from foreign countries, their businesses were
extremely sensitive to tariff laws. 68 Thus, the acquisition of Puerto Rico
was a pivotal moment for American refineries, dramatically expanding
access to lower-cost and tariff-free raw sugar. 69
For Puerto Ricans, however, the timing of the acquisition could not
have been worse. After a long struggle, Puerto Ricans had finally
secured some autonomy from Spanish rule in 1897. 70 La Carta
Autonmica 71 promised suffrage to all male Puerto Ricans and
authorized the island to participate in trade negotiations and to
65. Id.
66. See F. R. Rutter, The Sugar Question in the United States, 17 Q. J. ECON. 44, 44
(1903) (stating that at the time the article was written, the U.S. sugar industry was
divided into three separate factions: the cane sugar growers in the Deep South,
the beet sugar factories in the West and the North, and the sugar refiners, mostly
based in the Northeast).
67. See, e.g., ANDREA STUART, SUGAR IN THE BLOOD: A FAMILYS STORY OF SLAVERY
AND EMPIRE 15154 (2012) (exploring the history of sugar trade in Barbados through the
lens of one familys story). See generally MATTHEW PARKER, THE SUGAR BARONS: FAMILY,
CORRUPTION, EMPIRE, AND WAR IN THE WEST INDIES (2011) (providing an historical account
of sugar trade in the West Indies and its broader role in the global economy).
68. JAMES L. DIETZ, ECONOMIC HISTORY OF PUERTO RICO: INSTITUTIONAL CHANGE
AND CAPITALIST DEVELOPMENT 10305 (1986).
69. Id.
70. See Jos Tras Monge, La Carta Autonmica de 1897: Cien Aos Despus, 67
REVISTA JURIDICA UNIVERSIDAD DE PUERTO RICO (REV. JUR. U. P.R.) 973 (1998)
(reflecting upon the promised autonomous regime).
71. Not even a year before the U.S. invasion, Spain had finally relaxed its colonial
grip on Puerto Rico pursuant to an autonomous constitution, La Carta Autonmica
(the Autonomic Charter), which authorized a new insular government to rule on
matters of local concern. See id.

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stipulate tariffs. 72
Before Puerto Ricans could develop an
autonomous regime, however, Spain transferred the island to
another colonial power, the United States.
Pursuant to the Treaty of Peace between the United States and
Spain (Treaty of Paris), through which the United States acquired
Puerto Rico, and in accordance with its constitutional power to
oversee any Territory or other Property belonging to the United
States, 73 Congress assumed direct control over Puerto Rico. 74
Initially, the United States placed Puerto Rico and its inhabitants
under military rule. 75 Throughout the early part of the twentieth
century, the United States not only dictated political relations with
Puerto Rico, but also orchestrated a full-scale fiscal restructuring by
instituting a series of military orders, legislative enactments, judicial
decisions, and executive actions. Although often accompanied by
humanitarian rhetoric, these refinements primarily reflected a desire
to maintain the competitiveness of U.S. corporations in an
increasingly global economy. 76
From the beginning, the United States portrayed itself to the
Puerto Rican people as a benevolent patriarch. For instance, in his
proclamation to the islands inhabitants after leading the U.S.
invasion in the Spanish-American War, Major General Nelson Miles
of the U.S. Army articulated the noble purpose of the U.S.
government to give the people of [the] beautiful island the largest
measure of liberty. 77 General Miles further explained that the
United States would bring protection to person and property, while
promoting prosperity. 78 He wrote, It is not our purpose to interfere
with any existing laws and customs that are wholesome and beneficial
to your people[,] so long as they conform to the rules of military
administration of order and justice. 79 Rather, the U.S. military
72. Id. The concession may have been nothing more than a desperate move by
Spain, which could have been revoked at a later date; thus, Puerto Ricans were
certainly not insulated from future Spanish repression.
73. U.S. CONST. art. IV, 3, cl. 2.
74. Treaty of Paris, supra note 63, art. IX, 30 Stat. at 1759.
75. JUAN CRUZ-RICART, A BRIEF HISTORY OF PUERTO RICO 18002008, at 67 (2013)
(reprinting portions of Military Governor of Puerto Rico John B. Brookes Executive
Order, which established military rule over Puerto Rico).
76. See infra Part II.AB (describing the first two stages of U.S. tax imperialism
in Puerto Rico).
77. THE SPANISH-AMERICAN WAR: THE EVENTS OF THE WAR DESCRIBED BY EYE WITNESSES
192 (Herbert S. Stone & Co. 1899) [hereinafter THE SPANISH-AMERICAN WAR].
78. Id.
79. Id.

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would confer upon the island nation the advantages and blessings of
enlightened civilization. 80 Back at home, Republican Congressman
Marriott Brosius explained, [O]ur duty in respect to [the Puerto
Ricans] is so clear as to be free from difficulty. We must take care of
them until they can take care of themselves. 81
But, after centuries of Spanish rule that exacted a heavy toll on the
islands natural resources 82 and had an especially devastating impact
on Puerto Rican society, 83 the American takeover had almost
immediate negative economic consequences. Prior to the cession,
Puerto Rico traded heavily on a tariff-free basis with Spain and Cuba.
Following the war, Puerto Rico found itself shut off from these
markets, 84 leading Brigadier-General George W. Davis to
acknowledge in 1899 that American sovereignty for Puerto Rico has
so far been disastrous to its commerce, for it has deprived the island
of [the] markets where[in] [] nearly one-half of its total output 85 was
sold. Further compounding matters, the island initially faced high
tariffs for trade with the United States, effectively shutting it off from
U.S. markets as well. 86 For these and related reasons, writers for the
80. Id.
81. Marriott Brosius, The Ethics of Expansion, reprinted in MEN AND ISSUES OF 1900:
THE VITAL QUESTIONS OF THE DAY 76 (James P. Boyd ed., 1900).
82. See, e.g., Thomas E. Benner, American Difficulties in Porto Rico, 8 FOREIGN AFF.
609, 609 (1930) (highlighting that the Spanish exhausted the islands gold mines
and the United States did not discover any further mineral resources).
83. Of course, the social, political, and economic impacts of centuries of Spanish
colonial rule cannot be reduced to any one or several legacies. But among the
countless negative consequences of colonial rule, the introduction of slavery stands
as a particularly noteworthy one. See, e.g., ENCYCLOPEDIA OF THE AFRICAN DIASPORA:
ORIGINS, EXPERIENCES, AND CULTURE 77374 (Carole Boyce Davies ed., 2008)
(explaining the history of slavery in Puerto Rico); Alejandro Tapia y Rivera, African
Slavery, in THE INTELLECTUAL ROOTS OF INDEPENDENCE: AN ANTHOLOGY OF PUERTO
RICAN POLITICAL ESSAYS 5461 (Iris M. Zavala & Rafael Rodrguez eds., 1980)
(highlighting Spains introduction of slavery, which caused particularly damaging
and persisting racial tensions and injustices on the island); see also RUBY ROHRLICH
LEAVITT, THE PUERTO RICANS: CULTURE CHANGE AND LANGUAGE DEVIANCE 42 (1974)
(describing how Spanish colonial rule nearly destroyed Puerto Ricos native population
through enslaving them and forcing them to assimilate to Spanish culture).
84. See THE INSULAR CASES, COMPRISING THE RECORDS, BRIEFS, AND ARGUMENTS OF
COUNSEL IN THE INSULAR CASES OF THE OCTOBER TERM, 1900, IN THE SUPREME COURT OF
THE UNITED STATES, INCLUDING THE APPENDIXES THERETO, H.R. DOC. NO. 509, at 737
(2d Sess. 1901) (explaining how Spain erected its tariff wall immediately, even before
ratifying the Treaty of Paris).
85. REPORT OF BRIGADIER-G ENERAL G EORGE W. D AVIS ON CIVIL A FFAIRS OF
P UERTO R ICO 34 (1899).
86. See LAIRD W. BERGAD, COFFEE AND THE GROWTH OF AGRARIAN CAPITALISM IN
NINETEENTH-CENTURY PUERTO RICO 204 (1983) (explaining how the sudden lack of

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New York Times would remark in 1903 that Puerto Rico has not
prospered under the rule of the United States, and that [i]t was far
better off when Spain governed it. 87 As the following section reveals,
the islands economic struggles were further amplified by a U.S.imposed fiscal reconstruction.
A. Stage One of U.S. Tax Imperialism in Puerto Rico, 18981919
Notwithstanding General Miles assurance that the United States
would not unnecessarily interfere with Puerto Rican laws and
customs, 88 [t]he American commanding general . . . at once
exercised his power of legislation, and statute after statute was
abrogated. These were generally tax laws . . . . 89 The regime later
explained that it found in force a system of taxes and public duties
unlike any that had existed in the United States. 90 Although the
economic preferences of the previous Spanish colonial regime and
the new U.S. imperial power were similar in many respects, the
islands extant tax system would require numerous adjustments
before it could serve U.S. economic interests. In going about this
fiscal reconstruction, American policymakers strived to align Puerto
Ricos tax laws with prevailing U.S. theories of taxation 91 and to
provide the ideal economic setting for U.S. corporations doing
business in Puerto Rico.
Meanwhile, in public debate and
promotional materials, policymakers relied upon moral preaching to
justify changes, establishing a pattern for public discourse on U.S.Puerto Rican fiscal relations that continues to the present day. 92

access to foreign markets was especially devastating to the islands coffee industry).
87. Porto Rico Not Prospering Under United States Rule, N.Y. TIMES, Oct. 4, 1903.
88. THE SPANISH-AMERICAN WAR, supra note 77, at 192.
89. ANNUAL REPORTS OF THE WAR DEPARTMENT FOR THE FISCAL YEAR ENDED JUNE 30,
1900: REPORT OF THE MILITARY GOVERNOR OF PORTO RICO ON CIVIL AFFAIRS, at 41 (1902).
90. Report of the Treasurer of Porto Rico, reprinted in ANNUAL REPORT OF THE
GOVERNOR OF PORTO RICO FOR THE FISCAL YEAR ENDING JUNE 30, 1907, at 62 (1907)
[hereinafter Report of the Treasurer (1907)].
91. See Paul Salamone, Constitutional Separation and the Foraker Act: How They
Influenced Puerto Ricos Tax Reform from 18981901 and Led to the Adoption of the Import
Excise and Property Tax, 64 REVISTA DEL COLEGIO DE ABOGADOS DE PUERTO RICO (REV.
COL. ABOG. P.R.) 34, 36 (2003) (describing Puerto Ricos tax system as a modified
version of the federal import excise).
92. See discussion infra Part III.C (providing a discussion of U.S. tax imperialism
in Puerto Rico from 1975 to the present).

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1.

U.S. evaluation of Puerto Ricos extant system of taxation


In 1899, Dr. Henry K. Carroll, a U.S. Special Commissioner to
Puerto Rico sent by President William McKinley to examine civil
affairs on the island and, in particular, to evaluate the system of
taxation, 93 opined that while Puerto Rico had no public debts and
had even been in a position to lend money to Spain to support the
war in Cuba, 94 its tax laws were quite different from those in place on
the mainland. 95 Under Spanish rule, insular revenues were obtained
primarily through indirect taxes 96 in the form of customs duties and
stamp taxes. The municipal governments similarly relied upon
indirect taxes, largely in the form of excise taxes 97 on food stuffs, fuel,
and other articles of consumption, 98 called consumo 99 taxes.
Additionally, the government relied on lotteries and some direct
taxes, 100 including fees for the issuance of personal identification

93. Reforms in Puerto Rico: Commissioner Carroll Returns and Tells of Conditions There,
N.Y. TIMES, Mar. 31, 1899.
94. H. K. Carroll, What Has Been Done for Porto Rico Under Military Rule, AM.
MONTHLY REV. REVS., July-Dec. 1899, at 705; see also Report of the Treasurer of Porto Rico,
reprinted in WAR DEPT, ANNUAL REPORTS, 1919, VOL. III, at 36061 (1919) [hereinafter
Report of the Treasurer (1919)] (reporting that although the Spanish Crown extended
numerous tax breaks to European settlers in Puerto Rico, the island itself was
financially self-sufficient for most of the nineteenth century).
95. Carroll, supra note 94, at 705.
96. In an economic sense, an indirect tax is one that is collected indirectly
such as through a merchantrather than through a direct assessment upon the
person who ultimately bears the economic burden of the tax. Generally speaking,
indirect taxes are applied to particular transactions, such as purchases or sales, or
imports and exports. Indirect taxes are generally believed to be more regressive,
with the burden falling more heavily upon persons with fewer economic resources.
See generally BENT HANSEN, THE ECONOMIC THEORY OF FISCAL POLICY 26078 (P.E.
Burke trans., 1958) (explaining direct versus indirect taxation).
97. Excise taxes are taxes laid upon the manufacture, sale, or consumption of
commodities within the country, upon licenses to pursue certain occupations, and
upon corporate privileges. Flint v. Stone Tracy Co., 220 U.S. 107, 110 (1911).
98. The system of taxation in place in Puerto Rico at the time of the U.S.
takeover is described in J.H. Hollander, Excise Taxation in Porto Rico, 16 Q. J. ECON.
187 (1902) [hereinafter Hollander, Excise Taxation]. See also J.H. Hollander, The
Finances of Porto Rico, 16 POL. SCI. Q. 553 (1901) [hereinafter Hollander, Finances of
Porto Rico]; Report of the Treasurer (1907), supra note 90, at 6263 (describing Puerto
Ricos existing system of taxation).
99. See Robert W. Turner, Consumo Taxes in Spain, Sept. 12, 1889, in REPORTS FROM
THE CONSULS OF THE UNITED STATES, H.R. MISC. DOC. NO. 232, at 33839 (1st Sess. 1889)
(explaining that consumo taxes are levied upon articles of consumption).
100. See supra note 96 and accompanying text (explaining that direct taxes are
imposed upon each person, who remits the amount owed directly to the government).

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papers and licenses on industrial and professional occupations. 101


Finally, Puerto Ricans were subjected to a percentage tax upon net
income derived from agricultural, forest, and pasture land, from the
increase of livestock, and from rentals of urban property. 102 This
territorial tax was based on the net income of property, in
comparison to property taxes on the mainland, which were based on
assessed value of the property. In this way, the territorial tax was
especially threatening to U.S. sugar corporations: it essentially
functioned as an income tax on agricultural operations in Puerto
Rico at a time in history when the federal government did not even
have a comprehensive individual or corporate income tax. 103
In public comments, U.S. policymakers claimed that the Spanish
system of taxation fell unfairly on Puerto Ricos lower classes. Carroll
critiqued the system as downright oppressive, commenting that
[t]he rule in Porto Rico 104 seems to have been to pay as you go and
to collect everything collectible. The wonder is that the people had
anything left after paying the demands of the government. 105
Carroll also suggested that the governments policies were designed
to benefit [Spanish] manufacturers and producers rather than the
Similarly, Johns Hopkins University
Puerto Rican people. 106
economist and Treasurer of Puerto Rico, Jacob Hollander, later
noted that the general policy of the Spanish administration in Porto
Rico [was] economic exploitation, 107 complaining that the Spanish
system imposed a lighter burden upon the financial, banking,
101. See Annual Report of the Governor of Puerto Rico for the Fiscal Year Ending June 30, 1907
6263 (describing these and other components of Puerto Ricos extant system of taxation).
102. See Report of the Treasurer (1907), supra note 90, at 6263 (listing these and
other miscellaneous sources of revenue, and describing the tax overall as a
territorial tax); see also ROSA E. CARRASQUILLO, OUR LANDLESS PATRIA: MARGINAL
CITIZENSHIP AND RACE IN CAGUAS, PUERTO RICO, 18801910, at 48 (2006) (describing
the mechanisms for imposing the territorial tax in that area).
103. See infra notes 17984; 25456 and accompanying text (describing the
eventual adoption of a comprehensive U.S. corporate excise tax in 1909 and the U.S.
income tax in 1913); see also infra note 156 and accompanying text (explaining the
more specific excise tax imposed upon the gross receipts of companies engaged in
the sugar refining business).
104. Most American mainlanders misspelled the islands name until the original
Castilian spelling was officially recognized by the United States in Joint Resolution of
May 17, 1932, 47 Stat. 158.
105. Carroll, supra note 94, at 705.
106. Id. at 706.
107. Report of the Treasurer of Porto Rico, reprinted in FIRST ANNUAL REPORT OF
CHARLES H. ALLEN, GOVERNOR OF PORTO RICO, COVERING THE PERIOD FROM MAY 1,
1900, TO MAY 1, 1901, at 150 (1901) [hereinafter Report of the Treasurer (1901)].

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exporting, importing, and distributive interests[, which] were almost


exclusively in the hands of Spanish merchants, while imposing a
higher burden upon small retail and manufacturing activities[,
which] were generally in the hands of Porto Ricans. 108 In a 1901
interview, Dr. Jos Celso Barbosa, a Puerto Rican physician and
statehood activist, raised similar criticisms of the Spanish system: the
burden fell upon the poor people, who were in no position to make
their protests heard. 109 With respect to the territorial tax on
property, historian Rosa Carrasquillo recently identified similar
failings through archival research in Caguas, Puerto Rico. Citing a
number of documented injustices, she concluded that the system
was subject to manipulation, abuses, and discriminatory practices
against people of the lower classes. 110
To be sure, reproaches of this sort would resonate strongly with the
U.S. public. Throughout the late-nineteenth and early-twentieth
centuries, a growing populist movement 111 decried the U.S.
Critics
governments heavy reliance upon indirect taxes. 112
characterized tariffs and excise taxes on consumer products as
regressive in nature, alleging that the burden fell primarily upon the
lower classes. 113 U.S. mainlanders had also widely protested the
nineteenth century general property tax, which was a highly
politicized and polarizing levy . . . [as well as] extremely arbitrary in
practice. 114 Thus, the criticisms articulated by U.S. policymakers and
Puerto Rican activists with respect to the islands Spanish colonial system
of taxation were familiar and deeply sympathetic to mainland observers.
But, comments by Thomas Adams, a prominent tax scholar who
consulted with the military government on Puerto Rican fiscal policy,
reveal other, less-publicized U.S. trepidations over the then extant
system of taxation. Lawmakers were not merely concerned with the
plight of island workers and consumers. Appearing before the
108. Id.
109. Porto Rican Conditions: Secretary Hunt Declares that the Outlook Is Encouraging,
N.Y. TIMES, June 4, 1901.
110. CARRASQUILLO, supra note 102, at 43.
111. See AYALA & BERNABE, supra note 1, at 25 (explaining the emergence of the
populist movement); ROBERT C. MCMATH, JR., AMERICAN POPULISM: A SOCIAL HISTORY
18771898, at 5065 (1993) (same).
112. See AJAY K. MEHROTRA, MAKING THE MODERN AMERICAN FISCAL STATE: LAW,
POLITICS, AND THE RISE OF PROGRESSIVE TAXATION, 18771929, at 23 (2013) (noting
that the revenue system consisted mainly of indirect taxes on alcohol and tobacco
and that the working class bore the brunt of these taxes).
113. Id. at 13.
114. Id. at 4.

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American Economic Association in 1901, Adams discussed consumo


taxes on sugar and other agricultural products shipped out of Puerto
Rico and on coal brought into the island, which, he argued, using
anecdotal evidence, were too high. 115 He also suggested that Puerto
Rico imposed higher licensing taxes on foreign importers than on
Puerto Rican entrepreneurs. 116 Finally, he criticized Puerto Ricos
failure to levy excises on goods that were considered socially
undesirable by U.S. standards, such as alcohol and tobacco. 117 He
expressed hope that under a U.S. system of taxation the peon will
get a little more codfish and a little less rum. 118
Thus, the military government acted quickly to reconfigure Puerto
Ricos system of taxation. It dismantled the previous bureaucratic
structure and designated an office within the civil secretarys office to
administer and collect taxes, which would be directed by Puerto
Rican writer and historian, Dr. Cayetano Coll y Toste. 119 American
officials discontinued the government lottery, the consumo taxes, the
stamp taxes, and many of the customs duties. 120
In 1907, Professor Hollander questioned the military governments
sweeping changes, particularly its abolishment of successful Puerto
Rican stamp taxes that had yield[ed] considerable revenues without
imposing an onerous burden on any particular class, and were
actually less extensive than existent internal revenue taxes on similar
He remarked that the
transactions in the United States. 121
governments eradication of the consumo taxes, in particular, was far
from the benevolent end contemplated. 122 He explained,
In Porto Rico the economic relations of retail trade are determined
by custom rather than by competition; and the sudden removal of
octrois simply resulted in increased profit to the retailer rather than

115. Thomas S. Adams, Porto Rican Finance Under the Spanish and American
Governments, in PAPERS AND PROCEEDINGS OF THE FOURTEENTH ANNUAL MEETING [OF
THE AMERICAN ECONOMIC ASSOCIATION], 3 AM. ECON. ASSN Q. 314, 32528 (1902).
116. Id. at 325.
117. Id. at 341.
118. Id.
119. Report of the Treasurer (1901), supra note 107, at 14951.
120. See L.S. ROWE, THE UNITED STATES AND PORTO RICO: WITH SPECIAL REFERENCE
TO THE PROBLEMS ARISING OUT OF OUR CONTACT WITH THE SPANISH-AMERICAN
CIVILIZATION 190 (1904); see also Report of the Treasurer (1907), supra note 90, at 63
(suggesting that the military government abolished the stamp tax, also known as the
derechos reales, out of a mistaken belief that it was a form of royal dues to the
Spanish crown inconsistent with American principles).
121. Hollander, Excise Taxation, supra note 98, at 188.
122. Id.

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in reduced cost to the purchaser. The municipal treasuries were


depleted, and a minimum benefit was derived by the consumer. 123

He remained highly critical of the license taxes that were retained, as


they seemed to favor Spanish entrepreneurs while disproportionately
burdening others:
The financial and commercial interests were almost exclusively in
the hands of Spanish merchants, and upon these classes the rates
of taxation were relatively low. The small retail and manufacturing
activities were generally in the hands of Porto Ricans, and upon
these the taxes were comparatively high. 124

Notwithstanding these reflective criticisms, the U.S.-led fiscal


restructuring of Puerto Rico would continue unabated.
2.

U.S. adjustments to Puerto Ricos extant system of taxation


In search of new revenue sources and eager to abolish the Spanish
territorial tax, the military government in 1899 directed Dr. Cayetano
Coll y Toste to develop a new system of property taxation. In response,
Coll y Toste proposed a law that would no longer assess the tax based
upon income derived from agricultural property. Instead, assessments
would be based on the use and quality of the land, as determined by a
classification scheme. 125 In this way, Coll y Tostes new tax was
responsive to the needs of U.S. sugar corporations. But, while the
proposal reflected some aspects of U.S. mainland property taxation, it
continued to imitate Spanish modes of property taxation. For instance,
with respect to urban property, assessments would still be based upon
net rental value. 126 The tax also imposed a higher burden on nonresident owners of both urban and agricultural land, subjecting them to
an additional surcharge equal to fifty percent of the usual rate. 127
The military government made Coll y Tostes property tax effective
July 1, 1899. 128 The new law was debated among Puerto Ricans who
favored and condemned it, 129 with at least one Puerto Rican
123. Id.
124. Hollander, Finances of Porto Rico, supra note 98, at 556.
125. See Report of the Treasurer (1901), supra note 107, at 15152 (explaining that
agricultural lands were classified by usefor example, cane, coffee, and tobacco
and further sub-classified by qualityfirst, second, and thirdand that taxes were
imposed based on the quality classification of each use, meaning that lands of the
first class for any given use would pay a certain tax, lands of the second class would
pay a lesser tax, and so on).
126. Id. at 152.
127. Id.
128. Hollander, Finances of Porto Rico, supra note 98, at 556.
129. CARRASQUILLO, supra note 102, at 47.

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newspaper declaring it to be patriotic and fair, despite its


inherent flaws. 130 For his part, Professor Hollander, appointed in
February 1900 to conduct another evaluation of Puerto Rican tax
laws, 131 severely criticized the new law. 132 At the time, property taxes
were a primary source of public financing on the U.S. mainland, 133
and policymakers naturally had strong views regarding the proper
structure of such a tax.
Hollander did not censor his condemnations, even declaring that
Coll y Tostes new land classification scheme was crude and
primitive, stating that the scheme was based upon theories of
taxation that had been discarded by every civilized country on its
emergence from financial infancy. 134 He primarily argued that the
new property tax failed to properly incentivize more productive uses
of land, a flaw apparent in the tax exemptions given to uncultivated
agricultural and unimproved city property. 135 He further referred to
the laws two-year exemption for new houses and nonresident
surcharge on agricultural lands as unfortunate innovations. 136
Hollanders distaste for the nonresident surcharge may have
stemmed from the fact that it ran afoul of tax provisions in the
Northwest Ordinance, which many viewed as a highly persuasive
precedent for new U.S. territories. 137

130. See id. (explaining that the new tax would force small producers and owners
of large farms to pay the same tax percentage).
131. Puerto Rican Taxation Laws: Prof. Hollander Appointed Special Commissioner to
Revise Them, N.Y. TIMES, Feb. 23, 1900.
132. See infra notes 13437.
133. See generally John Joseph Wallis, A History of the Property Tax in America, in
PROPERTY TAXATION AND LOCAL GOVERNMENT FINANCE 13139 (Wallace E. Oates ed.,
2001) (explaining the role of property taxes in funding the U.S. government).
134. Hollander, Finances of Porto Rico, supra note 98, at 557.
135. Report of the Treasurer (1901), supra note 107, at 152.
136. Id.
137. See BARTHOLOMEW H. SPARROW, THE INSULAR CASES AND THE EMERGENCE OF
AMERICAN EMPIRE 27 (2006) (stating that the Northwest Ordinance and all
subsequent similar legislation prevented territorial and state legislatures from taxing
nonresidents land higher than residents land). The Northwest Ordinance was
enacted in 1787 and served as the fundamental governing instrument for the
Northwest Territory. 16 AM. JUR. 2d Constitutional Law 7 Westlaw (database
updated Aug. 2015). Among its provisions, the Northwest Ordinance provided that
nonresident proprietors may not be taxed higher than residents. An Ordinance for
the Government of the Territory of the United States north-west of the river Ohio,
art. IV, 1 Stat. 50, 52 n.(a) (1789).

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Following a devastating hurricane in August 1899, 138 the military


government found itself in severe financial distress. In response to
pressure from large landownersparticularly corporate agricultural
interests 139the government halted the collection of most taxes, as
well as all enforcement activities, even allowing for remittance of
some taxes already paid. 140 The insular government attempted to
raise revenue by establishing, via military orders, new consumer
excise taxes on liquor, matches, oleomargarine, and playing cards. 141
The new taxes, which essentially copied the so-called sin taxes that
were becoming increasingly common on the U.S. mainland, 142 were
extremely unpopular among islanders. Residents expressed their
disapproval through a variety of evasion techniques, including
outright fraud and illicit trade. 143 Dealers and merchantswho were
generally native Puerto Ricansalso protested the new laws,
complaining of a lack of clarity as to which articles were covered and
whether the taxes applied to existing inventories imported under
much higher tariff regimes. 144

138. See generally Stuart B. Schwartz, The Hurricane of San Ciriaco: Disaster, Politics, and
Society in Puerto Rico, 18991901, 72 HISP. AM. HIST. REV. 303, 304 (1992) (detailing the
hurricanes social implications and horrendous devastation to Puerto Rico).
139. Id. at 31012 (explaining how landowners petitions for tax relief for
everyonenot just people who could document a loss after the hurricanespurred
the grant of the tax holiday).
140. General Orders, No. 125, Aug. 22, 1899, in REPORT OF BRIG. GEN. GEO. W.
DAVIS ON CIVIL AFFAIRS IN PUERTO RICO, at 144 (1899).
141. See LAWS, ORDINANCES, DECREES, AND MILITARY ORDERS HAVING THE FORCE OF
LAW, EFFECTIVE IN PORTO RICO, MAY 1, 1900, H.R. DOC. NO. 1484, at 197778 (2d Sess.
1909) (summarizing the excises and other miscellaneous taxes established by
general orders of the U.S. military); see also Report of the Treasurer (1901), supra
note 107, at 154 (explaining that the military government also established a poll
tax in 1899 to support schools, although this tax was largely uncollected and
essentially discontinued in 1900).
142. See generally Rachelle Holmes Perkins, Salience and Sin: Designing Taxes in the
New Sin Era, 2014 BYU L. REV. 143, 15052 (explaining that before the U.S.
government reinstated the income tax on the mainland in 1913, it raised the
majority of its revenue through tobacco and alcohol taxes, also referred to as sin
taxes). For example, with respect to Puerto Ricos tax on oleomargarine, a similar
tax was initially imposed upon the food product on the U.S. mainland in 1886. Act
of Aug. 2, 1886, ch. 840, 24 Stat. 209, 20913; see McCray v. United States, 195 U.S.
27, 27 (1904) (upholding the federal tax on oleomargarine).
143. Hollander, Excise Taxation, supra note 98, at 18990.
144. See Porto Rican Tax Troubles: Protest Against Impost on German Beer and Other
Articles, N.Y. TIMES, June 16, 1900 (discussing the discrepancies and confusion
regarding the Foraker Acts taxation of alcoholic beverages).

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But the most sweeping changes came in Congresss first major


legislative act with respect to Puerto Rico, the Foraker Act of 1900. 145
The Foraker Act, which went into effect in the spring of that same
year, ended military rule and installed a civilian colonial government.
The Act placed the island within the U.S. common market 146 but also
established a peculiar brand of Puerto Rican citizenship, which
would be recognized only by the United States. 147
The Foraker Act did not, however, establish a fully democratic
government. The U.S. President retained the right to appoint the
Governor, all heads of administrative departments, and all members
of the highest branch of the legislaturethe majority of which would
be U.S. citizens rather than native Puerto Ricans. 148 Moreover, any
acts by the lower branch of the legislature were subject to veto by the
upper branch, the Governor, or the U.S. Congress. 149 Puerto Rican
journalist and politician Vincente Balbs Cap complained that,
under this system, Puerto Rican political parties were meaningless:
they had no power to act. They do what the governing power and
[U.S.-controlled upper branch of the legislature] want them to
do . . . . 150 In his view, the notion of a republican form of
government in Puerto Rico was a sham, pursuant to which the
presidents representative use[d] the parties as instruments, to
pretend that he [was] vesting in the country faculties [that] the
governing power and the [upper branch of the legislature] reserve

145. Organic Act of 1900, ch. 191, 17, 31 Stat. 77, 81 (codified as amended at 48
U.S.C. 733, 736, 73840, 744, 866).
146. See infra notes 174, 176 and accompanying text (explaining that the Foraker
Act provided for a maximum of two years of reduced tariffs on certain goods, then
fully free trade, between the United States and Puerto Rico).
147. See Juan Manuel Carrin, Puerto Rican Nationalism and the Struggle for
Independence, in BERCH BERBEROGLU, THE NATIONAL QUESTION: NATIONALISM, ETHNIC
CONFLICT & SELF-DETERMINATION IN THE 20TH CENTURY 138 (1995) (exploring the
oddities of Puerto Rican citizenship extended under the Foraker Act); see also No
Citizenship for Porto Rico, CHI. TRIB., Dec. 21, 1906 , at 1 (The condition of the people
of Porto Rico is anomalous. They have no real citizenship anywhere.).
148. 17, 31 Stat. at 81 (addressing the appointment of the Governor); 18, 31 Stat.
at 81 (addressing the appointment of members of the highest branch of the legislature,
known as the Executive Council); 29, 35, 31 Stat. at 8384 (addressing the election of
delegates to the lower branch of the legislature, known as the House of Delegates). See
generally William Franklin Willoughby, The Executive Council of Porto Rico, 1 AM. POL. SCI. REV.
561, 56162 (1906) (describing the inner workings of the Executive Council).
149. Willoughby, supra note 148, at 568.
150. Vincente Balbs Cap, The Emigrants, in THE INTELLECTUAL ROOTS OF
INDEPENDENCE, supra note 83, at 127.

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absolutely to themselves. 151 This state of affairs was intentional. In


the words of William Franklin Willoughby, U.S.-appointed secretary
of Puerto Rico and president of the highest branch of the legislature,
in 1906, the civil government could not be fully democratic because it
was not free to deal with the dangers of misrule and inefficiency that
the experience of other Latin-American countries ha[d]
demonstrated to be present. 152
Although the political provisions frustrated many Puerto Ricans, it
was the Foraker Acts tariff provisions that polarized U.S. commercial
interests in the months leading up to the Acts passage. 153 On the
one hand, duty-free trade with Puerto Rico was highly threatening to
U.S. sugar beet and tobacco growers, as it meant new competition
from island producers in the markets for raw sugar and tobacco. 154
On the other hand, free trade was extremely attractive to powerful
North American cane sugar refining companies who stood to benefit
from the ability to purchase cheaper, tariff-free raw sugar from the
islands. 155 And the latter companies most likely believed they had
earned financial concessions after paying special excise taxes on
sugar refining activities during the Spanish-American War. 156
Adding further fuel to the debate, many opponents of free trade
feared that duty-free exchange with Puerto Rico would set a
dangerous precedent for the Philippines, which was widely viewed as
the United States troubled, yet deeply valuable gateway to

151. Id.
152. Willoughby, supra note 148, at 561.
153. George B. McClellan, The Porto Rican Tariff, in MEN AND ISSUES OF 1900: THE
VITAL QUESTIONS OF THE DAY 140 (James P. Boyd ed., 1900) (exploring the opposing
viewpoints regarding extending free trade to Puerto Rico).
154. Id.; see also AYALA & BERNABE, supra note 1, at 36 (noting the sugar beet
producers opposition to free trade with Puerto Rico).
155. AYALA & BERNABE, supra note 1, at 36; see also CARL STROEVER, THE HAWAIIAN
PROBLEM 2 (1898) (explaining the same benefits in relation to free trade with Hawaii);
Philippine Free Trade Would Help Sugar Trust, AM. SUGAR INDUSTRY & BEET SUGAR GAZETTE,
June 5, 1906, at 273 (noting the benefits of free trade with the Philippines to sugar
refining companies); cf. Senate Investigation: President Havemeyer of the Sugar Trust
Subpoenaed, AUBURN BULL., June 12, 1894, at 1 (describing an investigation into potential
relations between U.S. senators and the American Sugar Refining company).
156. War Revenue Act of 1898, ch. 448, 27, 30 Stat. 448, 464; see Spreckels Sugar
Ref. Co. v. McClain, 192 U.S. 397, 41213 (1904) (upholding the special excise tax as
a lawful and indirect tax, even though it was based on a percentage of a refiners
gross annual receipts above a certain amount); Roy A. Ballinger, A History of Sugar
Marketing Through 1974, ECON. RES. SERV. 1519 (1978), http://www.ers.usda.gov/
media/1731272/aer382a.pdf (describing the U.S.-Puerto Rico sugar trade following
the Spanish-American War).

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burgeoning Asian markets. 157 Acknowledging the prospect of ripple


effects beyond Puerto Rico, the named sponsor of the Foraker Act
focused his attention on the potential costs and benefits of the
proposed legislation to U.S. corporate interests. Citing the necessity
of new markets for American productsand the concomitant need
to carefully manage any potential spillover effects in the Philippines
Senator Foraker explained, [w]e have reached the point in the
development of our resources and the multiplication of our industries
where we are not only supplying our home demands, but are producing
a large surplus, constantly growing larger. Our greatest present and
prospective commercial need is for markets abroad.158
President McKinley, already well-known for supporting protective
tariffs that benefited U.S. commercial interests, advocated in favor of
free trade between the United States and Puerto Rico. 159 The
President publicly claimed that free access to U.S. markets would
help the Puerto Rican economy, which was in dire need of assistance
following the 1899 hurricane. 160 At least on the surface, his views
seemed to reinforce those of prominent Puerto Ricans. 161 But, just a
decade earlier, as chairman of the House Ways and Means
Committee, McKinley had exposed his alliance with large U.S. sugar
refineries. For instance, in 1890, long before the United States
acquired Puerto Rico, McKinley sponsored legislation allowing for
duty-free imports of all island sugars into the United States. Many
scholars believe the move was intended to benefit leading east-coast
sugar refineries who were struggling to compete with western
refineries that acquired duty-free raw sugar from Hawaii. 162 McKinley
revealed his preferences when he testified in Congress that, although
he supported free trade in raw sugar, [t]he refiners should have

157. AYALA & BERNABE, supra note 1, at 36.


158. JOSEPH BENSON FORAKER, SPEECHES OF J.B. FORAKER, 18691917, VOLUME 3, 64
(1917) (noting that U.S. commercial interests needed to sell surplus goods abroad
after fulfilling domestic demands).
159. See generally QUENTIN R. SKRABEC, JR., WILLIAM MCKINLEY: APOSTLE OF
PROTECTIONISM (2008) (exploring President McKinleys reputation for
protectionism).
160. See, e.g., President William McKinley, Third Annual Message to Congress
(Dec. 5, 1899), www.presidency.ucsb.edu/ws/?pid=29540.
161. See J.J. HENNA & M. ZENO GANDA, THE CASE OF PUERTO RICO 1418 (1899)
(making an impassioned plea for free trade).
162. CSAR J. AYALA, AMERICAN SUGAR KINGDOM: THE PLANTATION ECONOMY OF THE
SPANISH CARIBBEAN, 18981934, at 56 (1999); see also KEVIN PHILLIPS, WEALTH AND
DEMOCRACY: A POLITICAL HISTORY OF THE AMERICAN RICH 242 (2002) (intimating
McKinleys tendency to align with trusts).

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whatever duty will protect them against their foreign rivals in the
difference of the labor cost. 163 Then, after the largest sugar
refineries on the United States east and west coasts merged in 1894,
Congress reinstated the tariffs on imported sugar. 164
President McKinley was not the only politician to use humanitarian
rhetoric to justify actions in Puerto Rico that would benefit a
preferred corporate constituency.
For instance, Congressman
George B. McClellan, Jr., criticizing those who opposed free trade
with Puerto Rico, asked whether the United States, having acquired
Porto Rico in the interest of humanity and in the cause of liberty, . . .
shall govern it in the interest of [American beet sugar producers] and
in the cause of Connecticut [tobacco producers]? 165 McClellan,
reflecting a common interpretation of the Northwest Ordinance
that it prescribed the future political course of all new U.S.
territories 166assumed that the United States would eventually offer
statehood to Puerto Rico. Accordingly, he claimed, [t]o make her
fit for self-government[,] we must first care for her material
prosperity. 167 Of course, free trade was also attractive to the nations
leading sugar refineries, all located in or around New York City,
which McClellan represented in Congress. 168 The largest of them,
the American Sugar Refining Company (which controlled the socalled Sugar Trust), 169 was based in Brooklyn. 170
163. William McKinley, The Duty on Sugar, Speech in the House of Representatives, FiftyFirst Congress, May 20, 1890, reprinted in WILLIAM MCKINLEY, SPEECHES AND ADDRESSES
OF WILLIAM MCKINLEY 453 (1893); see, e.g., THE LOUISIANA PLANTER & SUGAR
MANUFACTURER, Vol. XXI, No. 22 (1898), at 340 (noting the effects of war on
consumption, supply, and demand).
164. See AYALA, supra note 162, at 56 (describing the merger).
165. McClellan, supra note 153, at 14041.
166. See SPARROW, supra note 137, at 1819 (noting that the Northwest Ordinance
reflected the ideals of protecting political, civil, and economic equality); see also
Shively v. Bowlby, 152 U.S. 1, 49 (1894) (holding that the Territories acquired by
Congress, whether by deed of cession from the original States, or by treaty with a
foreign country, are held with the object, as soon as their population and condition
justify it, of being admitted into the Union as States).
167. McClellan, supra note 153, at 141.
168. See DEBORAH JEAN WARNER, SWEET STUFF: AN AMERICAN HISTORY OF SWEETENERS
FROM SUGAR TO SUCRALOSE 530 (2011) (exploring the history of sugar refining in New
York). See generally UNITED STATES OF AMERICA, PETITIONER, AGAINST THE AMERICAN SUGAR
REFINING COMPANY, DEFENDANTS: PETITIONERS EXHIBITS, VOLUME II (1913) (setting forth
interview transcripts and other evidence detailing the extensive sugar refining business in
New York City in the decades leading up to the case).
169. In 1895, the company prevailed in the Supreme Court in an antitrust action
brought by the federal government after the company acquired a ninety-eight
percent monopoly of the U.S. sugar refining business. United States v. E.C. Knight

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Large American and European corporations doing business in


Puerto Rico also called for free trade, even advocating against all
forms of federal taxation on the island. For instance, a representative
for the Fritze-Lundt Company, a German-owned enterprise that was
then the largest shipper of sugar in Puerto Rico, stated, [i]f the tariff
had been removed at first, Porto Rico would now have double [the]
crops. 171 Mullenhoff & Korber, a prominent German financial
institution in Puerto Rico, declared that it would be a hard blow if
the internal revenues of the United States were applied here. 172
Indeed, a prominent Dutch sugar importing company173 would later win
a victory in the Supreme Court against the U.S. tariff on trade with
Puerto Rico in one of the first of the so-called Insular Tariff Cases. 174
In a final compromise, the Foraker Act provided for a tariff equal
to fifteen percent of the Dingley rate175 on certain goods exchanged
between the United States and Puerto Ricoincluding raw sugarfor a
period not to exceed two years, after which all trade would be duty-free.176
Seemingly in response to President McKinleys stated goal of providing
economic aid to the island, the reduced tariffs on Puerto Rican trade with
the United States, whether collected in the United States or in Puerto
Rico, and all other tariffs collected in Puerto Rico with respect to
international trade, would inure to the benefit of the Puerto Rican
Treasury. 177 During the interim period, the insular government was
expected to develop alternative revenue-raising measures. 178 In speeches
and promotional materials, sponsors of the bill focused on humanitarian
aims; no mention was made of the United States role in dismantling most
of Puerto Ricos previous sources of revenue.
Co., 156 U.S. 1, 1718 (1895).
170. See Federal Attack on Sugar Trust, N.Y. TIMES, Nov. 29, 1910; Guide to the
American Sugar Refining Company Records 2008.042, BROOKLYN HIST. SOCY (Apr. 9,
2012), http://dlib.nyu.edu/findingaids/html/bhs/arms_2008_042_american_sugar.
171. Porto Ricans Are Disappointed Over Courts Decision, L.A. HERALD, May 29, 1901, at 1.
172. Id.
173. See Elias S. A. de Lima, BANKERS MAGAZINE, Jan.-June 1910, at 66162
(providing a brief biography of the firms principal).
174. De Lima v. Bidwell, 182 U.S. 1, 2, 199 (1901) (holding that Puerto Rico was
no longer a foreign country for the purposes of U.S. tariff laws; accordingly, absent
congressional legislation, the U.S. government could not collect customs duties on
sugar shipped from Puerto Rico to other U.S. ports).
175. Dingley Tariff Act, ch. 11, 30 Stat. 151 (1897) (providing a schedule of tariff
rates on sugar, salt, tobacco, petroleum, and other goods and commodities).
176. See The President Is Right: Common-Sense View of the True Inwardness of the Puerto
Rican Matter, AM. ECON., Mar. 30, 1900, at 153 (explaining the compromise).
177. Id.
178. See McClellan, supra note 153, at 167.

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Moreover, in response to the demands of large corporations doing


business in Puerto Rico, the Foraker Act further provided that, with
the exception of the reduced tariff for U.S. trade, the normal tariffs
on international trade, and a federal equalization excise tax, 179 the
internal revenue laws . . . shall not have force and effect in Porto
Rico. 180 The provision was not a reference to any federal income
tax; the Supreme Court had declared that the first peace-time federal
income tax was unconstitutional in 1895, 181 and the Sixteenth
Amendment would not be ratified until 1913. 182 Rather, in 1900, the
United States primarily raised revenue through excise taxes on
alcohol, tobacco, playing cards, certain food items, and bank capital,
as well as stamp duties and inheritance taxes. 183 Additionally, the War
Revenue Act of 1898 imposed a special excise tax upon the gross
receipts of persons engaged in refining petroleum and sugar. 184
Although the Foraker Acts tax provisions would have been clearly
unconstitutional for a U.S. state, 185 the Supreme Court ruled that
179. Essentially, this was a protective tariff designed to safeguard U.S.
manufacturers. This special excise tax applied to goodsmainly tobacco and
distilled spiritsmanufactured in Puerto Rico and exported to the U.S. mainland, to
the extent such goods were like articles that, if manufactured in the United States,
would have been subject to federal excise taxes. 26 U.S.C. 765253 (2012); see also
Puerto Rico v. Blumenthal, 642 F.2d 622, 623, 625 (D.C. Cir. 1980) (describing the
scope and intent of the special excise tax); STEVEN MAGUIRE & JENNIFER TEEFY, CONG.
RESEARCH SERV., R41028, THE RUM EXCISE TAX COVER-OVER: LEGISLATIVE HISTORY AND
CURRENT ISSUES 1 (2010) (noting that from the taxs inception, its proceeds were
covered-over to the Puerto Rican treasury); David Kocieniewski, Rum Battle in Caribbean
Leaves Tax Hangover, N.Y. TIMES (Oct. 15, 2010), http://www.nytimes.com/2010/10/16/
business/16rum.html (reporting that the federal equalization tax on rum is still an
important source of revenue for Puerto Rico).
180. Organic Act of 1900, 14, 31 Stat. 77, 80 (codified as amended at 48 U.S.C.
733, 736, 73840, 744, 866).
181. Pollock v. Farmers Loan & Trust Co., 157 U.S. 429, 586 (1895) (holding that
taxes upon rents and profits of real estate and upon returns from investments of
personal property were in effect direct taxes upon such property and therefore
unconstitutional to the extent that they were not apportioned).
182. United States v. Sitko, 845 F.2d 43, 47 (2d Cir. 1988); see discussion infra
notes 26067 and accompanying text.
183. 26 U.S.C. 7652 (2012); see Bruce Bartlett, Taxing Sin: A Win-Win for
Everyone?, TAXANALYSTS (Sept. 22, 2010), http://www.taxanalysts.com/www/
features.nsf/Articles/4656FF5DE09AE5D1852577A600703965? (Among the earliest
federal taxes were those on alcohol, tobacco, and playing cards, and they remained
mainstays of the federal revenue system until the creation of the corporate and
individual income taxes in 1909 and 1913, respectively. In 1900, 50 percent of all
federal revenue came from taxing alcohol, tobacco, and playing cards . . . .).
184. See supra note 156 and accompanying text.
185. U.S. CONST. art. I, 8 (providing that all Duties, Imposts, and Excises shall

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Congress had the authority to create non-uniform revenue laws for


unincorporated territories, such as Puerto Rico. 186 The decision
would come to stand for the proposition that, although there were
certain constitutional protections that cannot be under any
circumstances transcended, matters of taxation were not as
fundamental as a citizens rights of liberty and property. 187 Especially
in matters of taxation, Puerto Rico would be treated as foreign to the
United States in a domestic sense. 188 And so, with the Supreme Courts
blessing, Congress imposed certain permanent and temporary tariffs on
trade between the United States and Puerto Rico, while also maintaining
that the internal revenue laws generally had no force and effect on the
island. In so doing, the United States quietly extended one of its earliest
federal tax incentives to U.S. companies doing business in Puerto Rico.
The key beneficiaries were the powerful Sugar Trust and other large
American corporations, who could obtain raw materials from the
newfound U.S. territory while receiving immediate relief from many
forms of U.S. taxation and, eventually, permanent relief from U.S. tariffs
on imports from and exports to the island.
Despite this result, Senator Foraker gave a very different
justification for declining to fully extend U.S. internal revenue laws to
Puerto Rico. Declaring that [n]o such favor has ever been shown to
any other people for whom we have legislated, 189 he offered a
humanitarian justification for the unprecedented move:
Are people who to-day [sic] can not buy bread to be subjected to
that kind of burden? . . .
[W]hen we found the Puerto Ricans in that situation, we stopped to
consider whether we could not in mercy toward these people, not in a
spirit of illiberality, not lacking generosity, but practicing the most
gracious generosity, find some way whereby we could exempt them

be uniform throughout the United States).


186. Downes v. Bidwell, 182 U.S. 244, 287 (1901) (noting that the Foraker Act
applied to Puerto Rico because Puerto Rico was a territory appurtenant that
belonged to the United States, but that it was not considered part of the United
States for purposes of the revenue clauses of the U.S. Constitution).
187. Id. at 295 (White, J., concurring).
188. Id. at 341. See generally FOREIGN IN A DOMESTIC SENSE: PUERTO RICO, AMERICAN
EXPANSION, AND THE CONSTITUTION (Christina Duffy Burnett & Burke Marshall eds.,
2001) (exploring the legal, social, and political consequences of the Supreme
Courts conception of Puerto Rico); Sam Erman, Citizens of Empire: Puerto Rico, Status,
and Constitutional Change, 102 CALIF. L. REV. 1181 (2014) (discussing the insular cases
and the evolution of empire under U.S. constitutional law).
189. Joseph Benson Foraker, Porto Rico: Speech of Hon. J.B. Foraker in the Senate of the
United States, reprinted in FORAKER, supra note 158, at 43.

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from this ruinous burden and raise revenues for their government in
some other manner that would rest more lightly upon them. 190

In speeches and promotional materials pertaining to the law that


would bear his name, Senator Foraker painted a picture of an island
that had no ability to generate its own revenues because its people
were unaccustomed to direct taxesat least in the forms then most
prevalent in the United States. For instance, he explained: [t]he
question presented to the framers of this bill was . . . whether Porto
Rico should be remitted to this system of direct taxation for the
raising of her revenues, or whether we would give her the revenues
derived by the methods of indirect taxation already
mentioned . . . . 191 He never acknowledged the United States role
in stripping away much of Puerto Ricos extant system of taxation two
years earlier. Rather, he referred to Americas [u]nprecedented
[g]enerosity 192 and, noting that [m]en do not do extraordinary
things without having extraordinary reasons therefor, 193 he
explained that the members of Congress were compassionate and
wanted to alleviate the burden of a direct tax. 194
Meanwhile, Professor Hollander, who claimed credit for Congresss
refusal to fully apply the internal revenue laws to Puerto Rico,
suggested that American lawmakers had been more restrained and
sensitive to Puerto Ricos culture:
The system of internal revenue taxation in the United States . . . is the result
of gradual development and is adapted to the conditions prevailing in an
economically advanced community. To extend this system in any degree en
bloc to Porto Rico, where social and economic conditions are radically
different, would be a financial error and an economic embarrassment.195

Professor Hollander also emphasized the generosity unique in the


annals of our political history, and typical of the future attitude of the
United States to Porto Rico. 196
But on balance, any such generosity was little more than symbolic;
the Foraker Act also authorized the United States to retire the Puerto
Rican peso, with drafters refusing a provision that would transfer an
amount equal to the nearly $2 million of seigniorage to the local
190. Id. at 9.
191. Joseph Benson Foraker, Protections Grave Peril, reprinted in F ORAKER, supra
note 158, at 57.
192. Id. at 56.
193. Id.
194. Id. at 57.
195. Hollander, Finances of Porto Rico, supra note 98, at 558.
196. Id. at 559.

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government. 197 The new civil governments first governor would later
acknowledge that the currency exchange caused the circulating
medium to contract by forty percent and imposed a hardship upon
the people. 198 The Act further increased the costs of trade by
requiring that Puerto Rican trade occur solely by American shipping
lines. 199 These and related facets of the legislation led Professor
James Dietz to conclude that [t]he Foraker Act was not simply a
political document, . . . it was also an economic instrument designed
to control Puerto Ricos economic life. 200 And, highlighting the
precise economic interests that the United States sought to advance
in Puerto Rico, following the passage of the Foraker Act in the spring
of 1900, President McKinley appointed Charles Herbert Allen, a
Massachusetts politician and founder of the American Sugar Refining
Company, to serve as the first U.S.-appointed Governor of Puerto Rico.201
a.

U.S. enforcement of tax laws in Puerto Rico

Following the establishment of the first civil government on May 1,


1900, a new insular revenue agency was formed to enforce Puerto
Rican taxes. The agency initially focused its attention on enforcing
the excise taxes on alcohol, tobacco, playing cards, and certain food
items, which Puerto Ricans had largely evaded. As Professor
Hollander explained, it became the definite policy of the civil
administration to enforce rigidly the excises as then existing, [with a
goal of] developing such a degree of popular respect for insular
revenue laws as to insure the prompt adoption and successful
operation of a rational system of excise taxation . . . . 202 The civil
government dedicated its resources to field inspections, monitoring,
and enforcement, employing an army of revenue officers, virtually all
of whom had a background in military service. 203 These efforts
197. See FORAKER, supra note 158, at 36970 (including testimony relating to this
aspect of the legislation).
198. Report of the Treasurer, supra note 108, at 6566.
199. Organic Act of 1900, 9, 31 Stat. 77, 79 (codified as amended 48 U.S.C.
733, 736, 73840, 744, 866); JAMES L. DIETZ, ECONOMIC HISTORY OF PUERTO RICO:
INSTITUTIONAL CHANGE AND CAPITALIST DEVELOPMENT 8990 (1986) (noting that the
U.S. merchant fleet was more expensive than that of other countries).
200. DIETZ, supra note 199, at 89.
201. Henry Macfarland, Charles H. Allen, the First Governor of Puerto Rico, AM.
MONTHLY REV. OF REVS. 563, 564 (1900) (stating that Allen initially wanted to decline
the appointment, but accepted out of a sense of patriotic duty).
202. Hollander, Excise Taxation in Porto Rico, supra note 98, at 192.
203. Id. at 19394; see also Report of the Treasurer (1907), supra note 90, at 177
(describing the military service background of internal revenue agents).

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reflected a revenue collection trend that had been in place on the


U.S. mainland since the 1880s: the increased enforcement of taxes,
including through a classic instrument of alien impositionthe
bountyto enforce their demands on the population. 204
Predictably, the civil governments enhancement of its revenue
collecting powers encountered significant public backlash:
Contempt for the law pervaded every class of the population. The
liquor-loving peasant in the rural districts sat up at night soaking the
stamps off his bottle of rum to be stuck on the next bottle he bought;
and the army officer in charge of the post canteen had [to] resort to the
United States District Court to test the propriety of denominating beer
an alcoholic beverage. . . . In certain localities cancelled stamps indeed
served as a minor circulating medium, available for re-use until worn to
tatters . . . . Open defiance of the law was not unknown.
On several occasions internal revenue agents were mobbed; and in
one notable instance two agents were severely clubbed and one of
them put in jail. 205

Nonetheless, the civil government persisted in its efforts to bring Puerto


Ricans into compliance with the laws, ultimately leading to improved
enforcement and collection of tax liabilities. The internal revenue agents
successfully increased the sale of stamps, and the Treasurer brought
several hundred cases of possible fraud to the district courts.206
3.

Further U.S. refinements to Puerto Rican tax laws: Property taxation


The United States completed its initial fiscal overhaul of Puerto
Rico in 1901, engineering a clean sweep of all existing laws relative
to taxation and establish[ing] an entirely new system to take its
place. 207 As American political scientist Leo Stanton Rowe remarked
several years later, taxation in Porto Rico was made to conform to
the system prevailing in the more advanced States of the Union. 208
Notably, policymakers instituted a direct tax on real and personal
property developed by Professor Hollander, who was appointed
Treasurer of the insular government in 1900. 209 This new source of
revenues made the interim tariff unnecessary and allowed for free
trade between the United States and Puerto Rico.

204. NICHOLAS R. PARRILLO, AGAINST THE PROFIT MOTIVE: THE SALARY REVOLUTION
191 (2013).
205. Hollander, Excise Taxation in Porto Rico, supra note 98, at 19495.
206. Id. at 195.
207. Report of the Treasurer (1907), supra note 90, at 63.
208. ROWE, supra note 120, at 192.
209. Hollander, Finances of Porto Rico, supra note 98, at 557.

IN AMERICAN GOVERNMENT, 17801940, at

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As its centerpiece, the new system imposed a one percent tax upon
the assessed value of real and personal property, which was
subsequently reduced to one-half of one percent 210 following a wave
of protests. 211 The Hollander law also continued the highly
unpopular excise taxes on liquor, tobacco, matches, and other goods;
license taxes on merchants selling those goods; stamp taxes upon
certain documents; an inheritance tax; a tax upon insurance and
surety companies; and an annual twenty-five dollar license tax upon
foreign corporations doing business in Puerto Rico. 212 Governor
Allen later remarked that these changes installed a purely American
system of taxation . . . to take the place of the old Spanish system that
had been in vogue for over 300 years. 213
The protests did not end following the reduction in the rate of
property taxation. The entire concept of taxing the value of
propertyas opposed to the income it generatedwas foreign to
Puerto Ricans, leading many to oppose the law. 214 Puerto Rican
landowners claimed that the rate of taxation would ruin them. 215
The loudest objections came from the islands elite classes, who
called upon the federal government to annul the tax on the basis that
it was unfavorable to the commercial interests of the island. 216
Puerto Ricans especially resented that property assessments were
made by a staff of centralized revenue agents hired and supervised by
a U.S.-appointed treasurer. 217 These revenue agents were not shy

210. Porto Rican Legislation: Tax Rate Cut Down One-HalfLand Leased to French
Railroad, N.Y. TIMES, Jan. 27, 1901.
211. AYALA & BERNABE, supra note 1, at 37.
212. Report of the Treasurer (1907), supra note 90, at 6364.
213. Gov. Allen Not to Resign: Will Remain in Porto Rico at the Presidents Request, N.Y.
TIMES, Apr. 7, 1901.
214. Porto Rico Tax Law to Stand: Government Unlikely to Heed Plea of Commissioners from
Island, CHI. TRIB., Apr. 13, 1901 (reporting that the landed aristocracy [did not]
understand the American idea of taxing land, and, therefore, made objections
to the President).
215. ROWE, supra note 120, at 195.
216. Make Appeal to Congress: Porto Ricans Want Hollander Revenue Law NullifiedSay
it Is Against Their Interests, N.Y. TIMES, Feb. 4, 1901; see Reply to Gov. Allen: Commissioner
Borda Declares Porto Rico Is Not ProsperousThe Revenue Law Condemned, N.Y. TIMES,
Apr. 11, 1901 (articulating criticisms of the Hollander law); see also CARRASQUILLO, supra
note 102, at 48 (Property owners across the island protested the bill, favoring the Spanish
system as highly civilized and condemning the new one as hateful and abusive.).
217. See AYALA & BERNABE, supra note 1, at 37 (noting how the governor appointed
assessors in Puerto Rico, which sparked protests, while elected municipal officials
typically had this appointment power in the United States).

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about increasing assessed property values: in May 1901, assessments


were increased by approximately sixty-six percent. 218
Many observers have alleged over the years that the tax was
administered in a way that privileged U.S. corporate interests. For
instance, island activist Pedro Albizu Campos accused the insular
government of appraising Puerto Rican-owned farms at the highest
possible prices in order to force owners to sell their lands, while
appraising U.S. land holdings at artificially low values and tolerating
U.S. landowners nonpayment of taxes. 219 In his landmark treatise on
U.S. interventions in Puerto Rico, Gordon K. Lewis detailed a
number of tax evasion techniques employed by U.S. firms, who, with
the tacit approval of the colonial regime, largely escaped the burden
of Puerto Rican taxation while enjoying generous federal incentives.220
In 1916, even the U.S. Forest Service complained that the Hollander
property tax incentivized the destruction of forests by increasing tax
assessments on land with timber while decreasing assessments on land
devoted to the growing of sugar cane, coffee, and tobacco. 221
Meanwhile, Puerto Ricans also protested the four consumer excise
taxes, which some argued were especially oppressive to the islands
native tobacco and rum industries. 222 Indeed, entrepreneurs warned
they would be forced to close those businesses. 223 But, in defense of
the new laws, Senator Foraker explained in a Chicago Tribune article
that the tax system was intended to improve conditions for the
200,000 [to] 300,000 persons who live in the interior and are in an
extremely destitute condition, living in huts of thatched palm and
with few cooking utensils or any of the other attributes of civilization
and comfort. 224 Once again, appealing to mainland populist
218. See Higher Assessment in Porto Rico, N.Y. TIMES, May 18, 1901 (noting how the
San Juan property valuation increased from $9 million to $15 million).
219. See Pedro Albizu Campos, Observations on the Brookings Institution Report, in THE
INTELLECTUAL ROOTS OF INDEPENDENCE, supra note 83, at 175 (condemning the
practice of auctioning off Puerto Rican farms for two dollars); see also BAILEY W.
DIFFIE & JUSTINE WHITFIELD DIFFIE, PORTO RICO: A BROKEN PLEDGE 5556 (1931)
(observing that a sugar corporations taxes were not based on the full value, market
value of stock, capital value, or physical assets of the corporation).
220. GORDON K. LEWIS, FREEDOM AND POWER IN THE CARIBBEAN 9899 (1963).
221. See Louis S. Murphy, Forests of Porto Rico; Past, Present, and Future, and Their
Physical and Economic Environment, U.S. DEPT OF AGRIC. BULL. NO. 354, Oct. 20, 1916,
at 1416 (arguing the forest should be classified as a crop to encourage more
favorable taxation structures to maintain forests).
222. Porto Ricans Protest: Commissioners See the President and Present Arguments Against
the Hollander Tax Bill, N.Y. TIMES, Mar. 12, 1901.
223. ROWE, supra note 208, at 195.
224. Porto Rico Tax Law to Stand, CHI. TRIB., Apr. 13, 1901.

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sentiments, the article concluded that those Puerto Ricans who


protested the new taxes were aristocra[ts]. 225
Scholars have long debated whether the new property tax led to
wide-scale foreclosure of small landowners properties and a
corresponding increase in land accumulation by large, absentee U.S.
corporations. 226 In 2007, sociologist Csar J. Ayala and professor and
director of the Federico de Ons Hispanic Studies Center at the
University of Puerto Rico Rafael Bernabe, observed that Governor
Allen was explicit about his intentions: Id tax a little life into them.
Every Portorican has a right to demand that every acre of rich sugar
land should be developed, and Id tax it until they had to put up or
shut up. 227 The authors concluded that [h]igh assessments would
force large landowners with idle lands to sell, while at the same time
forcing small property owners to enter the market economy, either
as small producers or as wageworkers, in order to obtain dollars to
pay the tax. 228 In 1996, Ayala similarly explained that:
as a result of [the Hollander property tax], the peasantry polarized. The
middle land owning sectors lost ground as land became concentrated
into larger farms, at one extreme, and into ever smaller peasant plots on
the other, as existing peasant plots were subdivided to heirs, creating a
multiplication of farms too small for viable commercial exploitation.229

Moreover, through differentiation of the peasant economy and


expropriation, many peasants lost their lands. 230
But, in a separate empirical study, Ayala and his co-author Laird
Bergad determined that the imposition of U.S.-style property taxation
did not necessarily lead to more concentrated land tenure in Puerto
Rico, in part because land holdings were already highly concentrated
under Spanish rule. 231 Given that Hollanders property tax exempted
land valued at less than $100 from taxation, it would seem that the
two positions can be reconciled. The subdivision of peasant plots
might have offset the increased concentration of land holdings.
Meanwhile, any increased concentration of land holdings was more
225. Id.
226. See Csar J. Ayala & Laird W. Bergad, Rural Puerto Rico in the Early Twentieth
Century Reconsidered: Land and Society, 18991915, 37 LATIN AM. RES. REV. 65, 6972
(2002) (observing land ownership was highly concentrated well before 1898, and
the Hollander tax actually led to the growth of small farms).
227. AYALA & BERNABE, supra note 1, at 37.
228. Id. at 3738.
229. Csar J. Ayala, The Decline of the Plantation Economy and the Puerto Rican
Migration of the 1950s, 7 LATINO STUD. J. 61, 6263 (1996).
230. Id.
231. See Ayala & Bergad, supra note 226, at 72.

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likely to come at the expense of middle and upper class Puerto


Ricans, who held large plots of idle land that would be subject to
especially burdensome tax assessments.
This explanation is
consistent with Carrasquillos conclusion that the Hollander tax
shifted the control of land from local elites to U.S. corporations. 232
Likewise, Ayala and Bernabe summarized their argument thusly:
[T]he tax measure promoted both the rise of capitalist agriculture
based on the exploitation of a vast sea of wage laborers and the
fragmentation of some existing large landholdings. 233
Notwithstanding any lingering questions regarding the extent and
nature of observable changes in land ownership, it is undeniable that
Hollanders property tax exacted economic pressure on Puerto Rican
landowners, strongly incentivizing them to sell property outright or
use it more productively in order to pay the new taxes. 234 Indeed, this
is precisely what the tax was designed to accomplish. Thus, while it
may be difficult to quantify the impact of the new property tax on
land distribution in Puerto Rico, the tax unquestionably altered
patterns of land use and ownership in ways that were intended to better
align the islands resources with U.S. economic interests. As many have
argued elsewhere, the net effect of virtually all U.S. tax, economic, and
political policies with respect to Puerto Rico was to generate a monocrop
economy centered upon the sugar industry, with economic benefits
ultimately flowing almost exclusively to large U.S. corporations. 235

232. CARRASQUILLO, supra note 102, at 48.


233. AYALA & BERNABE, supra note 1, at 38.
234. Ayala, supra note 229, at 71; see CARRASQUILLO, supra note 102, at 4089
(noting that the tax system created a restructuring of property ownership based on the
quality of the land, where blacks disproportionately lost title to their land and the Mestizo
and blacks were only able to afford the poor, steep mountainside properties).
235. See, e.g., DIFFIE & DIFFIE, supra note 219, at 88 (providing the landmark
critique of U.S. policies contributing to a monocrop sugar economy); see also, e.g.,
BENJAMIN KEEN & KEITH HAYNES, A HISTORY OF LATIN AMERICA 585 (2013) (explaining
that U.S. policies created a monocrop sugar economy where title to land was
predominately concentrated in foreign corporations); IRIS LPEZ, MATTERS OF
CHOICE: PUERTO R ICAN WOMEN S STRUGGLE FOR R EPRODUCTIVE F REEDOM 21 (2008)
(remarking how Puerto Rico in the 1920s and 1930s was transitioning
economically under colonial rule, from a subsistence to a monocrop economy,
resulting in rural displacement and impoverishment); CARMEN TERESA WHALEN,
FROM PUERTO RICO TO PHILADELPHIA: PUERTO RICAN WORKERS AND POSTWAR
ECONOMIES 22 (2001) (noting that U.S. occupation led to sugars domination of
the economy, and it was grown on all four corners of the island); SANDRA L.
SUREZ, DOES BUSINESS LEARN?: TAX BREAKS, UNCERTAINTY, AND POLITICAL
STRATEGIES 23 (2000) (By the early 1900s, the island had become a monocrop
economy based on sugar, with absentee U.S. investors reaping the profits.).

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4.

Further U.S. refinements to Puerto Rican tax laws: Income taxation


Congressman Albert Douglas of Ohio expressed frustration toward
Puerto Ricans in a 1909 speech in the House of Representatives:
why is it nevertheless true that when, upon the plaza at San Juan, the
band of the Porto Rican regiment plays our Star-Spangled Banner
and every American present rises and stands uncovered, the natives
all sit in sullen silence? 236 He surmised: [t]hey certainly have
shown in many respects a lack of appreciation of what has already
But instead of
been accomplished in [sic] their behalf. 237
recommending expressions of gratitude, prolific writer and activist
Jos de Diego urged members of the lower branch of the Puerto
Rican legislature to arch the lips, relax the chest, tense up all the
vocal muscles and powers of will, and shout out that O of the NO! 238
to further intrusions by U.S. officials.
Yet any such attempts by Puerto Ricans to exercise what little
political power they had only brought further opposition and
chastisement. For example, Puerto Rican members of the lower
branch of the legislature proposed reforming the property tax,
authorizing municipal representatives and local landowners (mostly
native Puerto Ricans) to conduct local property assessments. 239 They
believed this would be preferable to Hollanders system, 240 in which
the office of the U.S.-appointed treasurer made centralized
assessments, and appeals were allowed to be made to a board
consisting primarily of U.S.-appointed officials. 241 However, the
Treasurer lobbied strongly against the Puerto Rican legislatures
proposal in his annual report, citing the wisdom of U.S. tax scholars
and claiming that local assessments would be clumsy, complex,
expensive, and inefficient. 242 Unsurprisingly, the proposed measure
failed to pass. As disagreements of this sort between native elected
236. 43 Cong. Rec. 994 (1909) (statement of Rep. Douglas).
237. Id.
238. Jos de Diego, No, in INTELLECTUAL ROOTS OF INDEPENDENCE, supra note 83, at 133.
239. Report of the Treasurer, in U.S. WAR DEPT, REPORT OF THE GOVERNOR OF PORTO
RICO TO THE SECRETARY OF WAR, 92 (1909) [hereinafter Report of the Treasurer (1909)].
240. See CARL C. PLEHN, REVENUE SYSTEMS OF STATE AND LOCAL GOVERNMENTS 827
(1907) (noting how in its first year of operation, the Hollander property tax relied
upon locally generated property assessments, but commencing in 1902, assessments
were centralized under the office of the treasurer).
241. Report of the Treasurer (1909), supra note 239, at 92.
242. Id.; see also WILLIAM FRANKLIN WILLOUGHBY, TERRITORIES AND DEPENDENCIES OF
THE UNITED STATES: THEIR GOVERNMENT AND ADMINISTRATION 150 (1905) (justifying
centralized administration of taxes by arguing that it would keep the process efficient
and prevent corrupt local officials from abusing the system).

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members and mainland appointees to the legislature mounted,


President William Taft publicly reprimanded the islanders for their
political immaturity: Porto Ricans have forgotten the generosity of the
United States . . . and the present situation indicates that the United
States has gone too fast in the extension of political power to them. 243
Indeed, in light of the early history described in the previous
section, it is not surprising that many Puerto Ricans were skeptical of
U.S. involvement in the islands affairs. While prominent Puerto
Rican literary figures grieved the islands loss of its formal ties to the
Spanish language, 244 influential political theorists highlighted the
hypocrisy of U.S. imperialism, and, echoing the same populist
sentiments that U.S. officials repeatedly used to justify their actions,
argued that Americas colonial relationship with Puerto Rico was
intended to benefit U.S. corporate interests. For instance, in a
poignant 1910 essay, journalist and activist Vincente Balbs Cap
wondered why [i]mportant Americans are so insistent on Puerto
Ricos unpreparedness to govern herself. 245 Differentiating islanders
from the peasant colonists from Great Britain who took up arms to
win independence, he reproached U.S. mainlanders for allowing
Puerto Rico to be exploited by the trusts who corner what wealth
remains . . . and take out most of the wealth it produces. 246 Balbs
also warned that American capital would destroy Puerto Ricos
economy, and that even in Congress itself, the trusts govern. 247
Reflecting on the conditions of Puerto Rican society on the island
and in New York, Jess Colnwidely regarded as the Father of the
Nuyorican Movementwould later remark, [t]he same American
243. Porto Ricans Unfit to Rule, Says Taft:
Tells Congress That Power Over
Appropriations Should Be Taken from Them, N.Y. TIMES, May 11, 1909.
244. See, e.g., Jos Mercado, The Castilian Language, in BORINQUEN: AN ANTHOLOGY
OF PUERTO RICAN LITERATURE 99 (Mara Teresa Babn & Stan Steiner eds., 1974)
[hereinafter BORINQUEN] (This knot, which force yesterday broke asunder, tie it, my
Castilian tongue. Eternal messenger of harmony, cross the immense sea that
separates us . . . for a flag can be changed, but never sentiments!); Manuel Zeno
Ganda, The Redeemers, in BORINQUEN: AN ANTHOLOGY OF PUERTO RICAN LITERATURE
107 (Mara Teresa Babn & Stan Steiner eds., 1974) (remarking, with respect to
American attempts to mandate the English language in Puerto Rican schools,
[t]hey spend our millions, so necessary for the fields and industries, in the teaching
of a language that is for our people . . . a dead tongue. . . . Never among us, can our
intimate thoughts be expressed in the English language).
245. Vincente Balbs Cap, Arent We Capable of Governing Ourselves?, in THE
INTELLECTUAL ROOTS OF INDEPENDENCE, supra note 83, at 123.
246. Id. at 12325.
247. SUGARLANDIA REVISITED: SUGAR AND COLONIALISM IN ASIA AND THE AMERICAS,
1800 TO 1940, at 16364 (Ulbe Bosma et al. eds., 2007).

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trusts that milked us in Puerto Rico were in control in New York. 248
And in 1911, lawyer and defender of independence, Rosendo
Matienzo Cintrn, argued that, to the extent Puerto Ricans had been
granted citizenship with colonialism, . . . [and] without
sovereignty, it would be a third citizenship, as degrading for
Americans as Puerto Ricans, . . . a citizenship granted for
convenience, a concession calculated by and for business. 249
Cintrn further warned that, [a]s long as you who mystify freedom
and your own countrys precepts continue to govern, Puerto Rico will
be governed by [] lie[s], by dirty business deals, and by the trusts. 250
To be sure, with Puerto Rico within the U.S. tariff wall, American
corporations thrived on the island. The largest U.S. sugar refining
companies vertically integrated their Puerto Rican operations into
their corporate structure, allowing them to extract considerable
economic rents from their monopoly control. 251 Meanwhile, the
insular government continued to struggle. The island was heavily
dependent upon tariffs on international trade at a time in history
when sovereign states were systematically negotiating to reduce and
even eradicate these duties. 252 In comments that were more broadly
focused on the evolution of trade policy, French economist Thomas
Piketty cogently described how [t]rade liberalization is not
necessarily a bad thing if the lost revenue can be replaced by other
substitute sources, and so long as it is not peremptorily imposed
from without. 253 Lacking the autonomy to establish its own tariffs or
alternative systems of taxation, the island remained at the mercy of
U.S.-led negotiations. Moreover, although the federal government
began to replace shrinking tariff revenues by, among other things,
248. COLN, supra note 38, at 71.
249. Rosendo Matienzo Cintrn, The Guachafita F, in THE INTELLECTUAL ROOTS OF
INDEPENDENCE, supra note 83, at 116. For a thoughtful debate concerning U.S.
citizenship for Puerto Ricans, see Jos A. Cabranes, Citizenship and the American
EmpireNotes on the Legislative History of the United States Citizenship of Puerto Ricans, 127
U. PA. L. REV. 391, 39798 (1978) (describing how Puerto Ricans were given a
second-class citizenship without the same rights as other Americans).
250. Cintrn, supra note 249, at 117.
251. See generally A YALA, supra note 162, at 10811 (noting how through vertical
integration, U.S. sugar companies were able to escape taxation by keeping profits
out of Puerto Rico).
252. For an historical snapshot of the revenue problems faced by Puerto Rico, see
U.S. DEPT OF COMMERCE & LABOR, COMMERCIAL PORTO RICO IN 1906: SHOWING
COMMERCE, PRODUCTION, TRANSPORTATION, FINANCES, AREA, POPULATION, AND DETAILS
OF TRADE WITH THE UNITED STATES AND FOREIGN COUNTRIES DURING A TERM OF YEARS
42 (1907) [hereinafter COMMERCIAL PORTO RICO IN 1906].
253. THOMAS PIKETTY, CAPITAL IN THE TWENTY-FIRST CENTURY 492 (2014).

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imposing a new federal excise tax on corporate income beginning in


1909, 254 it did not initially extend this corporate income tax to Puerto
Rico. 255 For these and other reasons, the Puerto Rican government
began in the early 1900s to rely upon debt financing as an alternative
revenue-raising device; these early bond issuances would represent the
insular governments first indebtedness in more than three decades. 256
The final nail in the coffin with respect to Puerto Ricos tariff
revenues came in 1913. After powerful lobbyists representing the
sugar refining industry persuaded Congress to do away with tariffs on
sugar traded beyond the U.S. common market, 257 Congress passed
the Underwood-Simmons Tariff Act, 258 a law that provided for dutyfree international trade in sugar after May 1, 1916. 259
After the tariffs on sugar exports were eradicated, the insular
government experienced a severe revenue shortfall. 260 The federal
government faced a similar loss of revenue, but it was able to protect
its public fisc by reinstating the income tax following the ratification
of the Sixteenth Amendment 261 and by imposing a new federal tax on
estates and gifts in 1916. In an effort to similarly replace lost
revenues on the island, Congress applied the corporate excise tax of
1909, 262 as well as the federal income tax laws of 1913 263 and 1916, 264
254. Tariff Act of 1909, Pub. L. No. 5, 38, 36 Stat. 11, 112 (1909) (providing for a
one percent excise tax on corporations net yearly income above $5,000). See
generally Steven A. Bank, Entity Theory as a Myth in the US Corporate Excise Tax of 1909,
in 2 STUDIES IN THE HISTORY OF TAX LAW (John Tiley ed., 2007) (exploring the history
and significance of this first tax on corporate income).
255. See HENRY CAMPBELL BLACK, A TREATISE ON THE LAW OF INCOME TAXATION
UNDER FEDERAL AND STATE LAWS 74 (1913) (noting that the Treasury Department
ruled that Porto Rican companies were exempt from the tax if they did not conduct
business in the United States).
256. COMMERCIAL PORTO RICO IN 1906, supra note 252, at 4244.
257. See E.P. Miller, Bourbon Inconsistency: How a Democratic Candidate for President
Looks at the Cuban Reciprocity Treaty, AM. ECON., Dec. 4, 1903, at 27374 (explaining
the Sugar Trusts desire to abolish sugar tariffs).
258. Underwood-Simmons Tariff Act, Pub. L. No. 16, 38 Stat. 114 (1913).
259. 177, 38 Stat. at 131.
260. See Report of the Treasurer, in U.S. WAR DEPT, REPORT OF THE GOVERNOR OF
PORTO RICO TO THE SECRETARY OF WAR, FISCAL YEAR ENDED JUNE 30, 1915, 240 (1915)
[hereinafter Report of the Treasurer (1915)] (remarking that revenues in Puerto Rico
were about $1,000,000 below expectations as a result of the changes in tariff laws).
261. See U.S. CONST. amend. XVI (paving the way for the adoption of a federal
income tax); see also Revenue Act of 1913, Pub. L. No. 16, 38 Stat. 114, 16681
(providing for an income tax).
262. See BLACK, supra note 255, 74 (amending the Tax Code to extend the
corporate excise tax to Puerto Rico, providing that any revenues collected on the
island would flow to the insular government).

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to Puerto Rico, and, consistent with its previous laws, provided that
any such taxes collected on the island would be transferred to the
Puerto Rican treasury. As Judge Learned Hand later opined,
Congress probably was acting merely as local sovereign 265 when it
extended federal revenue laws to the island in this manner, as Puerto
Rico at the time lacked the statutory power to enact a local income
tax of its own. In any case, actual collections in Puerto Rico were
extremely poor in the early years of the income tax; the insular
government collected approximately $67,000 in 1913 and $78,000 in
1914. 266 While collections would increase dramatically in the ensuing
years, eventually surpassing $500,000 in both 1916 and 1917, initial
receipts were insufficient to replace lost tariff revenues. 267
Meanwhile, another U.S.-led fiscal restructuring of Puerto Rico was
on the horizon. In March of 1917, Congress enacted the Jones-Shafroth
Act, extending U.S. citizenship268 and a bill of rights to Puerto Ricans, 269
and also granting general legislative powers to the island government.270
With respect to fiscal policy, the Jones-Shafroth Act purported to expand
the islands taxing powers. It provided that:
[N]o export duties shall be levied or collected on exports from Porto
Rico, but taxes and assessments on property, internal revenue, and
license fees, and royalties for franchises, privileges, and concessions
may be imposed for the purposes of the insular and municipal
governments, respectively, as may be provided and defined by the
Legislature of Porto Rico . . . .271

But much like the general grant of legislative authority, this provision
was in large part symbolic; all Puerto Rican legislative enactments
including tax lawswere required to be reported to Congress, which
reserved the right to annul them. 272
263. Revenue Act of 1913, Pub. L. No. 16, 3176M, 38 Stat. 180.
264. Revenue Act of 1916, Pub. L. No. 271, 23, 39 Stat. 756, 776.
265. Porto Rico Coal Co. v. Edwards, 275 F. 104, 107 (S.D.N.Y. 1921).
266. Report of the Treasurer (1919), supra note 94, at 353.
267. See id. at 35354 (anticipating that, in the future, the income tax would be
Puerto Ricos main source of revenue).
268. Jones Act of 1917, Pub. L. No. 368, 5, 39 Stat. 951, 953.
269. Id. 2, 39 Stat. at 951.
270. See id. 26, 39 Stat. at 958 (authorizing the formation of a popularly elected
Senate); see also supra note 14 (listing other acts and case law regarding Puerto Rican
citizenship and rights).
271. 3, 39 Stat. at 953; see Benedicto v. Porto Rican Am. Tobacco Co. 256 F. 422,
425 (1st Cir. 1919) (noting that the Puerto Rican legislature had no powers except
those granted expressly or by necessary implication by Congress).
272. See Organic Act of 1900, ch. 191, 23, 34, 31 Stat. 77, 82, 84 (codified as
amended 48 U.S.C. 733, 736, 73840, 744, 866).

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At the same time, the Jones-Shafroth Act implicitly recognized that


the islands cash flow requirements were unlikely to be satisfied
through insular taxation. Thus, the Act exempted Puerto Rican
government bonds from federal, state, and local taxes. 273 This triple
tax exemption made Puerto Rican government bonds highly
attractive to mainland financial interests, thereby giving the island
ample access to the debt markets to fund its general obligations.
Legislative history concerning the provision focused upon the
humanitarian benefits that would presumably flow to Puerto Ricans.
For instance, Senator James K. Vardaman explained that it is for the
purpose of enabling [the Puerto Rican people] to develop their
country [and] to make the securities attractive by extending that
exemption. It was thought by the committee that it would probably
be better for those people. 274
But Senator Vardamans humanitarian concern was out of
character for him, given that the Mississippi politician was not known
to display compassion for his fellow man: he is remembered mostly
for his racist commentary and advocacy of white supremacy. 275 On
the topic of U.S. citizenship for Puerto Ricans, for example, he
remarked: it is a misfortune for the United States to take that class
of people into the body politic. They will never, no, not in a
thousand years, understand the genius of our government . . . . [W]e
have enough of that element in the body politic already to menace
the Nation with mongrelization . . . . 276 Although he preferred
independence for the island, he acknowledged another reason for
continued colonial relations: the investments that have been made
there by American white men. 277

273. 48 U.S.C. 745 (1917) ([A]ll bonds issued by the Government of Puerto
Rico, or by its authority, shall be exempt from taxation by the Government of the
United States, or by the government of Puerto Rico or of any political or municipal
subdivision thereof, or by any State, Territory, or possession, or by any county,
municipality, or other municipal subdivision of any State, Territory or possession of
the United States . . . .).
274. 54 Cong. Rec. 2250 (1917) (statement of Sen. Vardaman).
275. See, e.g., Vardaman and the Fight of the Seven for the Vacant Senatorship in
Mississippi: Unique Career of the Man Who Surprised His Friends, N.Y. TIMES, Jan. 9, 1910
(Vardaman simply says that the negro is not qualified to be a voter, and that
political and social equality with the whites is not to be thought of.).
276. 54 Cong. Rec. 2250 (statement of Sen. Vardaman).
277. Id. (acknowledging that the current proposal was the most convenient
and practical).

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More likely, Senator Vardaman was motivated by his awareness 278 of


the nearly insatiable U.S. demand for municipal bonds at a time
when supply was less than normal. For instance, writers for the
periodical American Municipalities observed in 1916 that municipal
bonds were the premier investment security because they were
exempt from increasingly higher income tax rates. 279 However, the
supply of municipal bonds was very low. 280 By ensuring, through federal
law, that Puerto Rican public debt would receive the most preferential
tax treatment available to municipal bonds, Congress deflected attention
away from the fact that the United States had installed an ineffective
system of taxation in Puerto Rico, which did not generate sufficient
governmental revenue. It also capitalized on the islands plight by
expanding the municipal bond supply for U.S. investors. 281
In essence, through these legislative enactments, Congress once
again dramatically restructured Puerto Ricos system of taxation and
public finance. The island was forced to relinquish a large portion of
its tariff revenues. Then, to replace these revenues, Puerto Ricans
were subjected to a new and foreign form of direct taxation.
In late 1917, because collections from the federal income tax were
insufficient, the Puerto Rican legislature enacted a second, separate
income tax on the island. 282 Although, as states began to enact their
own income taxes, 283 the situation in Puerto Rico was similar to that
which was becoming increasingly common on the mainland,

278. Such awareness may have come via his son. See Memphis Banker Will Face Court,
ATLANTA CONST., Feb. 9, 1921, at 10 (noting that Senator Vardamans son, an
assistant manager of the bond department at a Memphis bank, was being
investigated for potentially selling stolen liberty bonds).
279. Municipal Financing in 1916, AM. MUNICIPALITIES, Jan. 1917, at 107.
280. Id.
281. Economically speaking, access to relatively inexpensive credit can be a good
thing. However, debt ratios must be carefully managed so that they do not inhibit
economic growth, leading to a vicious borrowing cycle. For Puerto Rico, excessive
borrowingnecessitated by an inadequate system of taxationhas ultimately led to
higher financing costs, which have further constrained access to much-needed credit.
See Sonia Coln et al., Puerto Rico: Still in the Spotlight, AM. BANKR. INST. J. 14 (2015)
(noting Puerto Ricos recent financial struggle as exacerbated by bonds). See generally
PUERTO RICO POLITICAL STATUS REFERENDUM 19891991, REPORTS AND STUDIES ON THE
PUERTO RICO POLITICAL STATUS AND RELATED ISSUES 43 (1992) (discussing mounting
economic challenges for the island).
282. Report of the Treasurer (1919), supra note 94, at 346.
283. See generally Harley L. Lutz, The Progress of State Income Taxation Since 1911, 10
AM. ECON. REV. 66, 66 (1920) (noting that after the successful implementation of an
income tax in Wisconsin, the measure has grown in popularity).

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Congress reacted to the new insular income tax as a potential source


of double taxation, rather than as an additional local tax.
Thus, in October 1917, Congress clarified its desire for a more
streamlined system of income taxation in Puerto Rico. It did so by
encouraging the Puerto Rican legislature to amend, alter, modify, or
repeal the [federal] income tax laws in force in Porto Rico. 284
Congress further emphasized the governments view of Puerto Rico
as a foreign nation through the Revenue Act of 1918, which included
a provision granting U.S. taxpayers a credit in an amount equal to
any income taxes paid to foreign countries, as well as any of the
possessions. 285 The credit mechanism was much more generous to
U.S. taxpayers than the deduction mechanism generally applied with
respect to state income taxes. 286 In essence, the federal law strived to
maintain Puerto Ricos status as a tax haven for U.S. companies,
notwithstanding the islands own efforts to exercise its growing
albeit still limitedtaxing powers.
In 1919, Congress sought to consolidate Puerto Rican income taxes
by encouraging the island to enact a comprehensive insular income
tax, which was a blend of the previously enforced federal and local
income tax mechanisms. 287 The new Puerto Rican law imposed a
three percent tax on the income of resident individuals and Puerto
Rican corporations, and a six percent tax on the income of
nonresidents and foreign corporations. 288 Any such taxes paid by
U.S. domestic corporations doing business on the island remained
creditable against federal tax liabilities.289
By the 191920 fiscal year, the fiscal restructuring of Puerto Rico
was complete. Evidencing the extent and nature of the changes, the
War Department published a chart comparing insular revenues for
the periods 1898 to 1899 and 1919 to 1920. 290 In the earlier period,
the government relied almost exclusively upon indirect taxes, with
less than ten percent of total revenues generated through direct taxes
on income from property. 291 More than two-thirds of the islands

284. Revenue Act of 1918, ch. 18, 261, 40 Stat. 1057, 108788 (1919)
(emphasis added).
285. Id. 222(a).
286. See id. 214(a)(3) (providing the domestic tax deduction).
287. 1919 P.R. Laws 613; Report of the Treasurer (1919), supra note 94, at 363.
288. 1919 P.R. Laws 616, 634.
289. Id. at 622.
290. Report of the Treasurer (1919), supra note 94, at 363.
291. Id.

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revenues came from customs duties, 292 and the remainder of


revenues came from sundry excise and transfer taxes. 293
By 1919 and 1920, however, more than half of the islands revenues
came from direct taxes on personal and corporate income and on the
assessed value of property. 294 Approximately thirty percent of total
revenues came from the new property tax, 295 with the income tax
providing an additional twenty-five percent of revenues. 296
Meanwhile, although indirect taxes were no longer the chief revenue
source, excise taxes continued to generate more than one third of
Puerto Ricos total revenues. 297 Notably, unlike the consumo taxes
they replaced, the new excises were much more limited in scope,
applying only to certain articles of consumption that were deemed to
be leisure items and/or socially undesirable. 298 In essence, the U.S.led fiscal reorganization lessened the islands reliance on some forms
of indirect taxation, such as tariffs and stamp duties, while
dramatically increasing reliance on other forms of indirect taxation,
such as sumptuary excise taxes. At the same time, the restructuring
introduced new forms of direct taxation of income and property.
5.

Assessing the U.S. fiscal restructuring of Puerto Rico


At least on the surface, the U.S.-led fiscal restructuring of Puerto
Rico appeared to mirror a much broader fiscal transformation that
was taking place on the U.S. mainland during roughly the same
period. In the late-nineteenth and early-twentieth centuries, the
emergence of income taxes gradually reduced reliance on indirect
levies, such as customs duties and excise taxes.299 At the same time,
systems of taxation on the mainland were increasingly centralized
and professionally administered. 300
Tax reforms in Puerto Rico superficially resembled those in the
states, but differed in many key respects. The gradual tax policy
changes on the U.S. mainland were accomplished through a
legitimate law making process and reflected an emerging consensus

292.
293.
294.
295.
296.
297.
298.
299.
300.

Id.
Id.
Id.
Id. However, virtually all of the proceeds flowed to the municipal governments.
Id.
Id.
See supra notes 14144 and accompanying text.
MEHROTRA, supra note 112, at 67.
Id. at 811.

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in support of the fiscal and social state. 301 However, like the previous
Spanish system of taxation, the new system in Puerto Rico was
constructed by foreign interlopers through an opaque, illegitimate
political process. And, while the transformation on the mainland was
primarily motivated by broad social justice concerns,302 the restructuring
of the Puerto Rican system of taxation was intended to advance U.S.
strategic and economic interests. In other words, as a matter of political
decision making, the changes made in Puerto Rico were the byproducts of
coercive power, rather than democratic deliberation.
The changes made in Puerto Rico were substantively different as
well. For instance, while on balance the professionalization and
centralization of tax administration on the U.S. mainland was a good
thing because it reduced reliance on potentially corrupt local officials
and encouraged uniformity and consistency in the application of
increasingly complex tax laws, the same transformation in Puerto
Rico was overwhelmingly destructive. Notably, it extinguished the
local populations remaining power over taxation. Thus, although
U.S. lawmakers in Puerto Rico cited the same social justice concerns
as they did on the mainland, the fiscal restructuring of the island had
profoundly different effects.
The historical account provided here sharply contrasts with the
prevailing U.S. and Puerto Rican narrative of a legitimate fiscal
foundation for the island, constructed through a representative
political process that was nurtured and facilitated by American
democratic ideals. 303 And, predictably, such a flawed political
decision making process generated poor substantive tax policy. From
the earliest days of military rule, the U.S. regime established a pattern
of rewriting laws to reduce taxation of U.S. corporations doing
business on the island and to increase direct and indirect taxation of
Puerto Rican consumers, landowners, and native enterprises. Rather
301. See generally PIKETTY, supra note 253 (exploring the historical relationship
between increased progressive taxation and the emergent social state).
302. MEHROTRA, supra note 112, at 910 (suggesting that those with the ability to
pay have a greater social obligation to contribute to the public good).
303. See generally Carlos E. Daz Olivo, The Fiscal Relationship Between Puerto Rico and
the United States: A Historical Analysis, REV. COL. ABOG. P.R. Apr.-Sept. 1990, at 32
(reflecting the dominant account of a legitimate tax system constructed through a
representative political process, and explaining that a local tax system, under which
the legislature levied taxes for real and personal property, inheritance, tobacco, alcoholic
beverages, and other products, defray[ed] the expenses of the Government); Felipe
Rodrguez Lafontaine, Puerto Rico Act 154: The Beginning of the End? Effects of Act 154 on
Future Economic Development, 2 U. P.R. BUS. L.J. 216, 21821 (2011) (describing the
prevailing modern view of the history of Puerto Ricos strong taxing powers).

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than incentivizing local entrepreneurship and capital growth, the tax


laws encouraged almost exclusive reliance upon mainland financing
and managerial expertise. 304 Meanwhile, the new system of property
taxation reconfigured access to land in real and consequential ways,
causing local landholding elites to lose power. The system also
facilitated U.S. sugar corporations dominance in a monocrop
economy with correspondingly high levels of dependence on wage
labor. 305 And, across the island, U.S. officials aggressive tax
collection and enforcement led to Puerto Ricans widespread mistrust
of revenue collection activities, poor compliance, and low tax
morale. 306 Even to this day, the island struggles with the social and
economic consequences of these policies. 307 Tax compliance rates on
the island remain relatively low. 308 At the same time, Puerto Ricos
relatively large underground and informal economy, estimated at
twenty-three percent of the islands gross national product, avoids
taxation. 309 These behaviors have fueled a vicious cycle in which the
island must levy high [taxes] on narrow bases, worsening tax
morale and creating further incentives for tax evasion. 310 In essence,
the U.S.-imposed system of taxation badly distorted the economy at a
critical point in history, cultivating negative habits and attitudes with
304. This critique echoes observations made by economist James Dietz in a 2003
work. See JAMES L. DIETZ, PUERTO RICO: NEGOTIATING DEVELOPMENT AND CHANGE 45
48 (2003) (stating that Puerto Rico relied on mainland U.S. financing and
entrepreneurial expertise instead of attempting to promote the development of local
sources of such knowledge). However, while Dietz attributed these conditions to the
Puerto Rican governments decision to initiate Operation Bootstrap in the late 1940s, I
argue that the groundwork was actually laid much earlier, by the U.S. tax and economic
policies put into place during stage one of U.S. tax imperialism in Puerto Rico.
305. At the same time, the economic shifts privileged Puerto Ricans who held
managerial roles in large U.S. corporations or professional service positions.
306. See generally Marjorie E. Kornhauser, A Tax Morale Approach to Compliance:
Recommendations for the IRS, 8 FLA. TAX REV. 599 (2007) (defining tax morale
generally as the intrinsic motivation to pay taxes).
307. See generally James Alm, Assessing Puerto Ricos Fiscal Policies, in THE ECONOMY OF
PUERTO RICO: RESTORING GROWTH 319 (Susan M. Collins et al. eds., 2006)
(highlighting the weaknesses of Puerto Ricos modern fiscal infrastructure).
308. See Michelle Kaske, Puerto Rico Seen Collecting Up to $6.7 Billion From Proposed Tax,
BLOOMBERGBUSINESS (Feb. 4, 2015), http://www.bloomberg.com/news/articles/
2015-02-04/puerto-rico-seen-collecting-up-to-6-7-billion-from-proposed-tax
[hereinafter Kaske, Puerto Rico Seen Collecting Up to $6.7 Billion From Proposed Tax]
(citing a report by the consulting firm KPMG which estimated that the rate of
compliance with the new sales tax in Puerto Rico is fifty-six percent).
309. FEDERAL RESERVE BANK OF NEW YORK, AN UPDATE ON THE COMPETITIVENESS OF
PUERTO RICOS ECONOMY 24 (2014).
310. Id. at 24.

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respect to revenue collection activities and leaving the islands


economy extremely fragile and dependent.
Indeed, the cumulative effects of Spanish and American colonial
policies meant that future growth was unlikely to develop organically
from the islands own entrepreneurial efforts. At the same time,
colonial history left a legacy of stunted taxing powers and impaired
revenue-raising abilities. If it is true that the Spanish system extended
preferences to peninsular interests, then the U.S.-led fiscal
reconstruction appears to have simply traded these external
preferences for new ones. These troubling consequences would be of
little immediate import to the island; in the subsequent years, the
United States would carve a very specific role for the colony that did
not require a thriving local economy or a strong local consensus with
respect to the importance of revenue collection. This role would
become more apparent in the second stage of U.S. tax imperialism.
B. Stage Two of U.S. Tax Imperialism in Puerto Rico, 19201974
For Puerto Rico, the 1920s were characterized by economic crisis,
political violence, and instability. 311 The tax and economic policies
that steered the island toward a monocrop economy left it incapable
of weathering a post-WWI global collapse in sugar prices. 312 Against
this backdrop, newly-appointed Governor E. Mont Reily instituted an
Americanism campaign on the island, promoting the use of the
English language and the flying of only the U.S. flag. 313 Naturally,
native politicians and U.S.-born appointed members of the insular
government sparred frequently, leading the extremely unpopular
Governor to declare that Puerto Rican party leaders were dictators
or plotters seeking to undermine the authority of the Federal
Government. 314 Puerto Rican officials retorted that the Governor
311. See generally Jos O. Sol, Partisanship, Power Contenders, and Colonial Politics in
Puerto Rico, 1920s, 38 CARIBBEAN STUD. 3 (2010) (exploring the political and
economic landscape of Puerto Rico in the 1920s).
312. See DEREK H. ALDCROFT, FROM VERSAILLES TO WALL STREET, 19191929, at 227
(1981) (describing the worldwide fall in sugar prices); MARK S. LECLAIR,
INTERNATIONAL COMMODITY MARKETS AND THE ROLE OF CARTELS 72 (2000) (same).
313. See, e.g., J.R. Hull, Letter to the Editor, English in Porto Rico, N.Y. TIMES, Sept. 27,
1921 (quoting the Governors inaugural address: I hope to see the language of
Washington, Lincoln and Harding taught equally with that of Spanish in our public
schools, and that all other languages shall be secondary); New Governor Takes Office in Porto
Rico, N.Y. TIMES, July 31, 1921 (reporting that Governor Rileys statement that there was no
room in Porto Rico for any flag other than Old Glory was met with great applause).
314. Denies Porto Rico Plans to Secede: President of the Island Senate Declares the
Unionist Party Is a Patriotic League, N.Y. TIMES, Dec. 19, 1921.

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was an irresponsible despot, who wraps himself in the folds of the


Star Spangled Banner and then attempts to rule our people after the
fashion of a Roman proconsul. 315 As Puerto Ricans began to
relocate in large numbers to the U.S. mainland, a politically active
and vocal community developed in New York City and demanded
improvements for the island. 316
Meanwhile, with the U.S.-led fiscal reconstruction completed,
history ushered in the second stage of U.S. tax imperialism in Puerto
Rico. During this period, which extended from 1920 through 1974,
the United States promulgated, maintained and encouraged tax and
economic policies that situated Puerto Rico as a lower-cost provider of
manufacturing inputs, thereby improving the global competitiveness of
U.S. corporations and lessening their dependence upon international
labor and materials. It is important to note that, because of the tax and
economic policy groundwork laid by the United States in stage one, this
was the only development option for Puerto Rico; the island would suffer
profoundly until it accepted and embraced this role.
One of this periods earliest tax laws 317 was designed to respond to
a perceived threat of double taxation for American corporations
doing business in the possessions: they were technically subject to
income taxes imposed by the possessions themselves, and to federal
income taxes imposed on all worldwide income. 318 Of course,
Congress had already eliminated any actual threat of double taxation
in earlier legislation, granting a foreign tax credit in an amount equal
to any taxes paid to the possessions. 319 Moreover, not all observers
were certain that insular taxation ought to be viewed as a source of
double taxation, which generally refers to the levying of taxes by
two separate sovereign states.
For instance, U.S. corporations doing business in states that had
enacted their own income taxes, beginning with Wisconsin in 1911, 320
315. Davila Asks House for Reily Inquiry, N.Y. TIMES, Apr. 5, 1922.
316. Angelo Falcon, A History of Puerto Rican Politics in New York City: 1860s to 1945,
in PUERTO RICAN POLITICS IN URBAN AMERICA 2427 (James Jennings & Monte Rivera
eds., 1984) (discussing how Puerto Ricans relocated to New York and formed
organizations to advocate on behalf of the island).
317. Revenue Act of 1921, ch. 136, 262, 42 Stat. 227, 271.
318. See Medchem (P.R.), Inc. v. Commr of Internal Revenue, 116 T.C. 308, 33334
(2001) (explaining this history), affd, 295 F.3d 118 (1st Cir. 2007); see also Revenue Act of
1918, ch. 18, 230, 40 Stat. 1057, 1077; Tariff Act of 1913, ch. 16, II, 38 Stat. 144, 166.
319. Revenue Act of 1918, ch. 18, 214, 222, 40 Stat. 1057, 106667, 1073.
320. See Harley L. Lutz, The Progress of State Income Taxation Since 1911, 10 AM.
ECON. REV. 66, 66 (1920) (noting after the successful implementation of an income
tax in Wisconsin, the measure grew in popularity).

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also encountered multiple tiers of taxation, and yet this was not
viewed by lawmakers in the same way. Indeed, Judge Learned Hand
made this very observation in 1921. In Porto Rico Coal Co. v.
Edwards, 321 a New York corporation that derived substantially all of its
income from activities in Puerto Rico in the years 1917 and 1918
made a claim of unlawful double taxation. 322 In his opinion, Judge
Hand explained that [t]he situation [wa]s . . . no different [than] if
[the plaintiff] had drawn its income from New York, or
Massachusetts, or any other state of the Union having an income tax.
It would have been subject to two taxes on the same propertyone for
local, and one for general, purposes. 323 But, rather than adopt Judge
Hands view of the possessions as members of a federal system that may
have multiple tiers of income taxation, Congress chose to continue
viewing them as foreign participants in a global taxing regime that
strongly disfavored double taxation. This likely reflected a deeply held,
biased view of the possessions as global playing fields for U.S.
corporations in their battle to compete with foreign counterparts.
Thus, Congress included section 262 in the Revenue Act of 1921,
citing concern that the double tax burden [had] placed American
businesses at a competitive disadvantage when compared with their
British and French counterparts, which were not subject to taxation
upon the profits they earned abroad unless paid back to the home
company. 324 But, section 262 went much further than the previously
enacted legislation extending the foreign tax credit to the
possessions; rather than offering a credit against federal taxes, it
outright exempted from federal income taxation all foreign-sourced
income of qualifying U.S. citizens and corporations to the extent that
at least eighty percent of such persons earnings from the three
preceding years derived from U.S. possessions (including, but not
limited to, Puerto Rico), and at least fifty percent of such persons
earnings from the three previous years derived from active income
earned in U.S. possessions. 325 For these purposes, income from

321. 275 F. 104, 10608 (S.D.N.Y. 1921).


322. Id.
323. Id. at 107.
324. Medchem (P.R.), Inc. v. Commr of Internal Revenue, 116 T.C. 308, 33334
(2001); see H.R. REP. NO. 350, at 8 (1921); 61 CONG. REC. 6997 (1921) (remarks of
Senator Smoot); see also U.S. GOVT ACCOUNTABILITY OFF., GAO-93-109, TAX POLICY:
PUERTO RICO AND THE SECTION 936 TAX CREDIT 2 (1993) (clarifying that section 262
was intended to help U.S. corporations compete with foreign firms in the
Philippines (then a U.S. possession)).
325. Revenue Act of 1921, ch. 136, 262(a), 42 Stat. 227, 271.

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sources within a U.S. possession was treated as foreign-sourced


income. As tax analyst David A. Buckley, Jr., explained in a 1921
monograph, [i]n substance[,] therefore[,] citizens or domestic
corporations conducting a trade or business in a possession . . . are
taxed by this Act only on the income from within the United States
and not on the income from the possessions if they comply with the
[eighty percent] and [fifty percent] provisions. 326
This provision essentially continuedat least for U.S. persons
doing business on the islandthe federal governments earlier
tradition of declining to extend the federal tax laws to Puerto Rico.
In this respect, while not a tax sparing mechanism 327 per se, but
rather an exception to the normal tax on worldwide income, 328 the
provision would ultimately have the same effect. By declining to
impose the tax that the United States would normally impose on
certain foreign income earned by U.S. persons, it encouraged the
possessions to extend generous tax incentives to attract capital. This
is because the exemption fully preserved the economic benefits to
investors of any tax incentives offered by the possessions; in contrast,
under a more customary foreign tax credit mechanism, these benefits
would have been merely offset by larger U.S. tax liabilities.
It is important to note, however, that section 262 was not targeted
at Puerto Rico, but rather at the Philippines. In fact, as the U.S.
Treasury later conceded, Puerto Rico was virtually ignored in the
public debate. 329 Because the islands economy was contracting
rather than expanding in the first half of the twentieth century, the
new law would have little impact on the Puerto Rican economy until
decades later, when the U.S. and Puerto Rican governments would

326. DAVID A. BUCKLEY, JR., FEDERAL TAXATION: AN INTERPRETATION AND ANALYSIS


35 (1921).
327. In tax policy literature, the phrase tax sparing is reserved for tax laws that
offer foreign tax credits equal toor even greater thanthe tax that would have
been collected by a developing nation, even if that nation does not actually impose
the tax. In other words, if the tax credit were not provided, the developing nations
tax incentives would not be as attractive because the investor would still pay the full
(and presumably higher) rate of taxation imposed by the more developed nation.
See generally Damian Laurey, Note, Reexamining U.S. Tax Sparing Policy with Developing
Countries: The Merits of Falling in Line with International Norms, 20 VA. TAX REV. 467
(2000) (exploring U.S. policy with respect to tax sparing mechanisms).
328. See 26 U.S.C. 61(a) (2012) (defining gross income as all income from
whatever source derived).
329. U.S. TREASURY DEPARTMENT, THE OPERATION AND EFFECT OF THE POSSESSIONS
CORPORATION SYSTEM OF TAXATION: FIRST ANNUAL REPORT, GOVERNMENT PRINTING
OFFICE 10 (1978).
WITH THE TEXT OF THE REVENUE ACT OF 1921, at

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make additional refinements to the patchwork of federal and insular


tax provisions impacting U.S. investors on the island.
So, for the immediate time being, Puerto Ricos economic troubles
worsened as problems mounted in the islands major agricultural
industries. In response to a global decrease in sugar prices during
the Great Depression, the U.S. government allowed U.S. sugar
producers to enter into a voluntary marketing agreement to control
production. 330 Each sugar producing region, including Puerto Rico,
was assigned a quota restricting its sale of sugar. 331 These restrictions
were a major setback to Puerto Rican workers in the sugar industry.
The new sugar production quotas caused the previously expanding
sugar producers to decrease wages in response to increased labor
competition and in an effort to protect their profit margins. 332
Meanwhile, the already-struggling Puerto Rican tobacco industry
began a calamitous decline during the 1930s, mostly due to
increased global competition and declining world prices.333 To add
further insult to injury, as islanders attempted to rejuvenate a onceburgeoning coffee industry, another powerful hurricane struck
Puerto Rico in September 1928, causing substantial damage to the
islands coffee plantations. 334 In the wake of the storm, although it
lacked power to levy customs duties, the Puerto Rican legislature
imposed an emergency import duty on all foreign coffee brought
into Puerto Rico. 335 Given the exigency of the situation, Congress
legalized and ratified the measure pursuant to the Tariff Act of 1930,
retroactively empowering the island to levy customs duties on
imported coffee. 336 But, this measure was not enough; the Puerto
Rican coffee industry would continue to suffer, with sales to the
330. RONALD FERNANDEZ, THE DISENCHANTED ISLAND: PUERTO RICO AND THE
UNITED STATES IN THE TWENTIETH CENTURY 116 (1992) (describing early attempts to
stabilize the sugar industry by allowing voluntary control of sugar production by
setting sugar-production quotas).
331. See id. (stating that states like Louisiana or Hawaii had seen their production
quotas rise, while Puerto Ricos sugar production quota was cut by a full twenty percent).
332. See GERALD MEYER, VITO MARCANTONIO: RADICAL POLITICIAN 19021954, at
15556 (1989) (exploring the economic and political consequences of the sugar
quotas); see also FERNANDEZ, supra note 330, at 116.
333. Teresita A. Levy, Tobacco Growers and Resistance to American Domination in Puerto
Rico, 18991940, at 6 (Commodities of Empire, Working Paper No. 17, 2010).
334. See ROBERT MYKLE, KILLER CANE: THE DEADLY HURRICANE OF 1928, at 47
(2002) (illustrating the importance of the recently thriving plantations for the
audience to understand the impact of the 1928 hurricane).
335. Porto Rico to Tax Imported Coffee, N.Y. TIMES, May 6, 1930, at 47; see 1930 P.R. Laws 742,
quoted in Porto Rico Brokerage Co. v. United States, 76 F.2d 605, 606 (C.C.P.A. 1935).
336. See 19 U.S.C. 1319, 1319a (2012).

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United States stalled for nearly eight years. 337 When productivity
finally normalized more than a decade later, the industry would
encounter further diminished prices on the world market. 338
In an effort to draw attention to the plight of the islands rural
populationand in response to increasing political attacks on
indigenous island culturePuerto Rican writers, poets and
songwriters in the 1930s frequently wrote allegories, with the main
character being the authentic Puerto Rican rural villager, el jbaro. 339
These depictions were intended to protest colonial rule and its
attendant economic exploitation. Take, for instance, music by
legendary Puerto Rican songwriter Rafael Hernndez.
Proindependence writer Jos Luis Gonzalez acknowledged Hernandezs
1929 composition Lamento Borincano as Latin Americas first protest
song, in that it captured [t]he tragedy of the Puerto Rican jbaro,
[which,] in the 1930s[, was] a helpless victim of poverty and spiritual
malaise. 340 Antonio Pedreira, Professor of Spanish Literature at both
the University of Puerto Rico and Columbia University during the
1930s, wrote extensively about Puerto Rican cultural identity and, in
particular, rural peasant culture. 341 These works challenged the
prevailing image of the rural worker, the jbaro, as a lazy, violent,
uneducated, and taciturn mestizo[, which] was widely diffused in
government circles and among the landed and commercial elite. 342
As deepening economic woes contributed to growing discontent
with American colonial rule, the highly contentious Puerto Rican
Nationalist Party gained considerable ground.343 The Nationalist Partys
chief complaint was that Puerto Rico was not seen as a nation, but rather

337. Shipment of Coffee Here by Puerto Rico Resumed, N.Y. TIMES, July 15, 1936, at 27.
338. Puerto Rico Asks U.S. Aid: Policy to Help Rehabilitate Coffee Industry Is Urged, N.Y.
TIMES, Oct. 28, 1939, at 6.
339. As a central character intended to represent Puerto Rican peasant culture, el
jbaro first began to appear in literature more than a century earlier. See, e.g., Manuel
A. Alonso, A Jbaro Wedding, in BORINQUEN, supra note 244, at 4043.
340. Gonzalez, supra note 40, at 49.
341. See, e.g., Antonio S. Pedreira, La Actualidad del Jbaro, in ENRIQUE A. LAGUERRE
& ESTHER M. MELN, EL JBARO DE PUERTO RICO: SMBOLO Y FIGURA 713 (1968)
(demonstrating tales of the jbaro).
342. Schwartz, supra note 138, at 313. See generally ILEANA M. RODRGUEZ-SILVA,
SILENCING RACE: DISENTANGLING BLACKNESS, COLONIALISM, AND NATIONAL IDENTITIES
IN PUERTO RICO (2012) (illustrating the complex racial and class hierarchies within
Puerto Rican society).
343. See Arnold Leibowitz, The Commonwealth of Puerto Rico: Trying to Gain Dignity
and Maintain Culture, 11 GA. J. INTL & COMP. L. 211, 22729 (1981) (chronicling the
growth of the Nationalist Party during the 1930s).

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as an island property that was taken through military intervention.344 In a


1936 speech, party leader Pedro Albizu Campos took precise aim at the
unjust concentrations of economic power on the island:
We stand as a nation surrounded by industry, but with little of it
belonging to our people. The business development in Puerto
Rico since the United States intervention should have made the
island one of the most prosperous islands in the world, but that is
not the case. The United States controls our economy, our
commerce. Puerto Rico must determine a price for its products
that is acceptable to the United States, while the United States
issues their products to Puerto Rico at a rate that is comfortable to its
own manufacturers and not the Puerto Rican consumer. The result
is exploitation and abuses perpetrated at will, resulting in poverty for
our people and wealth for the United States. Seventy-six percent of
the wealth is in the hands of United States corporations, and their
stability is ensured by the United States military. 345

While most Puerto Ricans declined to embrace Albizus


confrontational style and violent methods of protestindeed, his
followers would later attempt, among other things, to assassinate
President Harry Truman 346his social and political commentary
would be far more influential than his call to arms. As a result, other
less radical, but equally impassioned, socialist, independence, and
nationalist movements gained considerable steam during the 1930s
and 1940s, both on the island and among mainland Puerto Ricans. 347
Large-scale labor strikes, marches, and demonstrations occurred
throughout the 1930s, to which the colonial regime responded with a
campaign of repression. 348 In one of the bloodiest clashes, the

344. Pedro Albizu Campos, Puerto Rican Nationalism, in BORICUAS: INFLUENTIAL


PUERTO RICAN WRITINGSAN ANTHOLOGY, supra note 40, at 27.
345. Id. at 28.
346. See generally STEPHEN HUNTER & JOHN BAINBRIDGE, JR., AMERICAN GUNFIGHT:
THE PLOT TO KILL PRESIDENT TRUMANAND THE SHOOT-OUT THAT STOPPED IT (2005)
(highlighting the linkage between Trumans assassination attempt and Albizos
nationalist movement). Nationalist party followers were also linked to other violent
acts and conspiracies, including an attack on members of Congress and plots to
assassinate prominent mainland and Puerto Rican politicians. See 10 Puerto Ricans
Guilty of Plots, N.Y. TIMES, Mar. 11, 1955, at 16.
347. See, e.g., ROBERT W. ANDERSON, PARTY POLITICS IN PUERTO RICO 3242 (1965)
(describing the emergence of new parties and realignments of old ones during this
period); see also Falcon, supra note 316, at 37 (noting that the Puerto Rican
independence movement received widespread support in New York City
throughout the 1930s and 1940s).
348. This period is thoughtfully considered in Carrin, supra note 147, at 14142.
Many of the violent clashes were reported by mainland newspapers. See, e.g., 2 in

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Ponce massacre in March of 1937, the colonial regime killed nineteen


Puerto Rican nationalists and wounded many others. 349 The United
States would struggle to contain dissident elements of Puerto Rican civil
society for decades to come, ultimately leading the colonial power to
lessen its grip on the islands economic and political affairs.
In his September 1941 inaugural address, Rexford Tugwell, the last
U.S.-born appointed Governor of Puerto Rico, 350 attempted to
respond to widespread discontent within the island population. As a
devoted New Deal liberal, he vowed to tackle the overwhelming
poverty on the island and called upon Puerto Ricans to support his
vision of agricultural and industrial diversification. 351 Expressing
hope that the island would attract the other kind of capital
investment, he explained that [t]he time is past when absentee
capitalists can expect to extract extravagant percentages of gain,
using the peoples need and their own monopoly to force the
acceptance of [unfair] terms. 352
Governor Tugwell, with the support of President Franklin
Roosevelt and working in conjunction with legendary reformer Luis
Muoz Marn, who was then presiding over the Puerto Rican Senate,
initiated a number of populist reforms to remedy economic
imbalances on the island and restore social justice. Notably, his
government passed a land reform measure that promised strict local
enforcement of a previously ignored farm size restriction codified in
the Foraker Act. 353 The new law established a public Land Authority
(Authority) that would purchase any corporate farms that exceeded
five hundred acres. The Authority was financed through the insular
governments lucrative returns from tariffs on sales of rum to the

Puerto Rico Kill Police Head and Are Shot Dead: Nationalist Youths Murder Col. E.F. Riggs
in Revenge for University Massacre, N.Y. TIMES, Feb. 24, 1936, at 1; Four Killed in Clash in
Puerto Rico Town, N.Y. TIMES, Oct. 25, 1935, at 15.
349. J. MICHAEL MARTINEZ, TERRORIST ATTACKS ON AMERICAN SOIL: FROM THE CIVIL
WAR ERA TO THE PRESENT 156 (2012) (writing that police officials opened fire on the
unruly crowd and a hostile struggle followed).
350. See generally MICHAEL NAMORATO, REXFORD G. TUGWELL: A BIOGRAPHY (1988).
351. Inaugural Address, in PUERTO RICAN PUBLIC PAPERS: R.G. TUGWELL 511 (1945).
352. Id. at 8.
353. See, e.g., Sugar Acreage Limit Hailed in Puerto Rico, N.Y. TIMES, Mar. 27, 1940, at
9. The Foraker Act included a provision making it unlawful for corporations to own farms
greater than 500 acres, but this law was never enforced by the federal governmentindeed,
the federal provision lacked any enforcement mechanism. TRUMAN R. CLARK, PUERTO RICO
AND THE UNITED STATES, 19171933, 110 (1975) (describing the legislative history of the 500
acre restriction, and the lack of enforcement measures).

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mainland. 354 The government also instituted a number of laws that


gave preference to small farmers. For instance, it permitted any
farmer access to a small portion of the islands overall quota,
essentially allocating the quota with a preference for small farmers. 355
Similarly, the government required sugar factories to process cane
delivered by small farmers. 356
Historians largely view the Puerto Rican economic initiatives of the
early 1940s as unsuccessful. As Muoz Marn would later explain,
social justice attained at low levels of production may be honorable,
but it is inefficient for achieving true well-being. 357 Without
sufficient local enterprise to grow the economy, island policies would
need to specifically target foreign direct investment. Thus, priorities
shifted once again, coinciding with the Puerto Rican legislatures
passage of the Industrial Incentives Act of 1948 (the Act), 358 and the
popular election of Muoz Marn as the first elected governor in
1948. 359 Muoz Marn was a candidate of the Popular Democratic
Party, which favored maintenance of Puerto Ricos status as a U.S.
territory. 360 Specifically, Muoz Marn felt that Puerto Rico should
capitalize on the exceptional advantage of Puerto Ricos
fundamental economic asset: free trade with the United States. 361
Muoz Marn hoped that increased U.S. investment in Puerto Rico
354. The Bacardi rum company, originally founded in Cuba by Spanish
entrepreneurs, relocated production facilities to Puerto Rico in 1936. Tariff
advantages made it more attractive to produce in Puerto Rico and sell to the U.S.
mainland. Bacardi Runs Puerto Rico Plant, N.Y. TIMES, Apr. 18, 1937, at 59. Then,
because the U.S. government requisitioned whiskey for industrial uses during World
War II, rum manufacturers who were unaffected by the government order enjoyed a
Roman holiday of sorts, leading to sharp increases in Puerto Rican exports of rum to
the mainland and a dramatic rise in tariff collections. Puerto Rico Asks to Build Up
Trade, N.Y. TIMES, Jan. 3, 1949, at 70; see also supra note 179 and accompanying text
(describing the federal tariff cover-over program).
355. 28 L.P.R.A. 247 (1941).
356. BENJAMIN BRIDGMAN ET AL., FED. RES. BANK OF MINN., WHAT EVER HAPPENED TO
THE
PUERTO
RICAN
SUGAR
MANUFACTURING
INDUSTRY?
19
(2012),
https://www.minneapolisfed.org/research/sr/sr477.pdf.
357. DIETZ, supra note 304, at 52.
358. P.R. LAWS ANN. TIT. 13, 22138 (1948).
359. Puerto Rico Elects Munoz its Governor, N.Y. TIMES, Nov. 3, 1948, at 5 (declaring a
landslide victory in Puerto Ricos first direct election). In 1947, at Muoz Marns
urging, Congress passed the Elective Governor Act, allowing Puerto Ricans to choose
their Governor by popular ballot. See Pub. L. No. 362, 61 Stat. 700, 77071 (1947),
repealed by Act of July 3, 1950, ch. 446, 64 Stat. 319, 31920 (providing for the
organization of a constitutional government by the people of Puerto Rico).
360. Puerto Rico Elects Munoz its Governor, N.Y. TIMES, Nov. 3, 1948.
361. Puerto Rico Asks to Build Up Trade, N.Y. TIMES, Jan. 3, 1949, at 70.

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would enhance economic conditions for all Puerto Ricans. Working


closely with the federal government and the Puerto Rican legislature,
Muoz Marn spearheaded the Industrial Tax Exemption Act, which
included generous tax and economic incentives and launched what would
come to be known as Operacin Manos a la Obra (Operation
Bootstrap).362 The program was intended to transform the island from
a declining agrarian economy into an expanding industrial structure.363
As its centerpiece, Operation Bootstrap offered U.S. corporations
at least ten years of exemption from Puerto Rican income and
property taxes, as well as from most excise taxes, municipal taxes, and
license fees. 364 When combined with section 262 of the U.S. Tax
Code, 365 these tax incentives amounted to a total holiday from
virtually all forms of taxation. Operation Bootstrap included a
number of other economic subsidies to corporations investing in the
island. Muoz Marn engaged directly with Wall Street, traveling to
the mainland to make presentations that urged direct investment on
the island. 366 Finally, he recognized the value of tourism as a
prospective revenue source, calling upon the islands development
company to expand tourist facilities. 367
Pleased with the direction of economic policy on the island, and
under increasing global pressure to relax its imperial grip on its
colonies, Congress in 1950 passed a law authorizing Puerto Rico to
draft its own constitution, subject to approval by the people of Puerto
Rico and by Congress. 368 The law also repealed sections of the JonesShafroth Act, renaming the remaining sections the Puerto Rican
362. See Act of May 13, 1948, P.R. LAWS ANN. TIT. 13, 22138; see also LEWIS, supra
note 220, at 16770 (explaining that Operation Bootstrap would combat the battle
for production with a planned industrialization program to create new income
production, and that it transformed Puerto Ricos economy from being reliant on
agriculture to being driven mainly by industrial and manufacturing jobs).
363. LEWIS, supra note 220, at 167.
364. DIETZ, supra note 68, at 30001 (describing a legal construct that allowed for tax
free income on all non-expatriated assets to U.S. companies operating within Puerto Rico).
365. See supra notes 32426 and accompanying text (explaining that section 262
completely exempted U.S. persons from federal income tax on all foreign-sourced
income if they complied with the eighty percent and fifty percent provisions).
366. Puerto Rico Plea Put to Investors, N.Y. TIMES, July 29, 1949, at 25.
367. Island for Tourists: Puerto Rico Launches Drive for Visitors with Opening of a Fine
New Hotel, N.Y. TIMES, Dec. 18, 1949, at X17 (detailing the grand opening of the
Caribe Hilton and contrasting it with the relative dearth of hotels for tourism). See
generally DENNIS MERRILL, NEGOTIATING PARADISE: U.S. TOURISM AND EMPIRE IN
TWENTIETH-CENTURY LATIN AMERICA (2009) (discussing in detail the early
development of the Puerto Rican tourist industry).
368. Act of July 3, 1950, ch. 446, 64 Stat. 319 (codified at 48 U.S.C. 731916 (2012)).

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Federal Relations Act. 369 In preambles to the Act, the federal


government acknowledged the islands need to self-govern, and
authorized the Puerto Rican people to call a constitutional
convention to draft a governing instrument for the island. 370 The
Puerto Rican Constitution, which established the island as a
Commonwealth of the United States, was overwhelmingly approved
As a
by a popular referendum held on March 3, 1952. 371
commonwealth, the island would be self-governing under a
constitution of its adoption, possessing a right of self-government
[that] will not be unilaterally withdrawn by Congress. 372 The
Supreme Court further clarified in 1976 that Congress intended to
accord to Puerto Rico the degree of autonomy and independence
normally associated with States of the Union. 373
In 1954, the federal government further signaled its approval of
Puerto Rican tax and economic policy by expanding the possessions
tax exemption so that it applied not only to the possessions, but also
to the remaining U.S. territories. The resulting amended and restated
law was codified as section 931 of the U.S. Tax Code.374 That same year,
the Puerto Rican legislature expanded the Industrial Tax Incentives Act,
making it even more generous to U.S. corporations doing business on
the island. 375 The combined effect of the federal and local tax laws
meant that Puerto Rico was finally meeting its full potential as a tax
haven to U.S. corporations striving to compete internationally.
Over the years, scholars and commentators have debated whether
Muoz Marn was a mere puppet serving the interests of U.S.
imperialism in Puerto Rico. Without question, Pedro Albizu Campos
the controversial leader of the Puerto Rican Nationalist Partyheld this
view, referring to the governor as the puppet that is called Muoz
Marn while also remarking on all the yanquis that surround him. 376
Meanwhile, Juan Gonzalez, a leading member of the Young Lords
Organizationa Puerto Rican nationalist group formed on the

369. Id. 45, 64 Stat. at 31920.


370. Id. 64 Stat. at 319.
371. Puerto Ricos Constitution, N.Y. TIMES, Mar. 5, 1952, at 28.
372. U.S. DEPT OF STATE, 7 FOREIGN AFFAIRS MANUAL 1121.2-1 (2013).
373. Examining Bd. of Engrs, Architects & Surveyors v. Flores de Otero, 426 U.S.
572, 594 (1976).
374. Internal Revenue Code of 1954, 26 U.S.C. 931, repealed by Internal Revenue
Code of 1986, 100 Stat. 2593 (1986).
375. Industrial Tax Incentives Act of Puerto Rico of 1954, 1953 P.R. Laws 12, 16.
376. A. W. MALDONADO, LUIS MUOZ MARN: PUERTO RICOS DEMOCRATIC
REVOLUTION 300 (2006). Yanqui is an alternative spelling of Yankee.

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mainland in the 1960shad a more detailed list of grievances: [Muoz


Marn] . . . made a deal with the Gringo: he would become the first
Puerto Rican governor if he would agree not to push for independence
and accept his puppet role.377 Referring to Muoz Marn as the
biggest traitor in Puerto Rican history, the apostle of non-violence for
profit, and a lackey, he complained that the Governor
shipped [Puerto Ricans] by the hundreds of thousands to New York because
he could not provide jobs for them; . . . taught our people to be white middle
class americanos, when they were poor, oppressed boricuas; . . . destroyed the
jbaro with operation bootstrap, moving thousands off the land into the slums
of San Juan, and Ponce, and let all our money go to [U.S.] capitalists.378

Gumersindo Vidot, a Puerto Rican boxer who grew up


impoverished in Spanish Harlem, made a similar indictment in his
memoirs: Puerto Ricans were brought here with lies and promises.
New York Mayor Robert F. Wagner, Jr., with the help of Luis Muoz
Marn (who was . . . [a] puppet governor for the USA), had begun a
campaign to recruit . . . laborers from Puerto Rico to work in the citys
factories. 379 He further opined that [t]his campaign was called
Operation Bootstrap and was a big joke that only gave false hope.380
Indeed, many Puerto Ricans who resettled on the mainland not only
continued to struggle economically, but also faced discrimination. 381
In a 2001 work, Professor Carmen Teresa Whalen struggled to
detail these and similar criticisms of Muoz Marn and his political
party. Reflecting upon the work of other political theorists and
historians, she thoughtfully concluded, [t]here is no question that
the politicians and policy makers of the [Popular Democratic Party]
developed strategies and made decisions within the confines of the
colonial relationship. 382 In other words, the Governor declined to
really challenge the broader political and economic construct. It
seems that, from the depths of Puerto Ricos economic despair, he
acknowledged and embraced the only development path that was left

377. Juan Gonzalez, The Vote or the Gun, in THE YOUNG LORDS: A READER 82 (Darrel
Enck-Wanzer ed., 2010).
378. Id.
379. GUMERSINDO VIDOT, YOU ONLY LIVE TWICE: MY STORY, FROM BOOT STRAPS TO
SUCCESS 2930 (2010).
380. Id. at 30.
381. See, e.g., GINA M. PREZ, THE NEAR NORTHWEST SIDE STORY: MIGRATION,
DISPLACEMENT, AND PUERTO RICAN FAMILIES 7879 (2004); see also infra notes 39598
and accompanying text.
382. WHALEN, supra note 235, at 11.

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available to the island: serving as a tax haven and as a lower-cost


provider of manufacturing inputs to American corporations.
This was not simply an act of submission; rather, Muoz Marn and
other leaders of the Popular Democratic Party were most likely
deeply influenced by prevailing U.S. political and economic theories,
having witnessed through New Deal policies how American capital
could be redistributed to the less fortunate members of society. 383
Moreover, Muoz Marn deeply admired his father, a legendary proindependence activist dedicated to improving conditions for the
long-suffering jbaro. 384 Indeed, it was precisely his desire to improve
the islands economy for its most impoverished members that caused
him to question whether Puerto Rican independence was the right
course, at least in the short-term. 385 Thus, the argument that he and
his fellow partisans were mere puppets of U.S. corporate interests
seems an oversimplification of history; they most likely believed,
authentically, that the island could make substantial gains from trade
with the United States, which would then lift the tides for all.
To be sure, Operation Bootstrap was quickly hailed as a success. A
1949 article in the New York Times called the program one of the
most spectacular economic achievements of the post-war era. 386
American companies entered the island in droves and established
manufacturing facilities that hired great numbers of Puerto Ricans.
Throughout the 1960s, even as the rest of the United States slipped
into a business slump, Puerto Ricans enjoyed staggering growth in all
major economic sectors. 387 Puerto Ricos successes would continue
well into the 1970s, with a reporter for the Chicago Tribune declaring
in 1972 that per capita income on the island was now among the
worlds highest, comparable with the West European countries. 388

383. Id. at 1112; see also AYALA & BERNABE, supra note 1, at 22326 (thoughtfully
exploring the political conflicts concerning Puerto Ricos growing reliance on U.S.
capital during this and subsequent decades).
384. For instance, Muoz Marn penned the following as a young man: I would
like to be a giant . . . / to complete the work of [my father] Luis Muoz Rivera, / the
giant of Borinqun. CARMEN T. BERNIER-GRAND, POET AND POLITICIAN OF PUERTO
RICO: DON LUIS MUOZ MARN 25 (1995); see also id. at 5760 (describing his fathers
dedication to the jbaro); MALDONADO, supra note 376, at 2754 (exploring his fathers
legacy and its impact on him as a young politician).
385. MALDONADO, supra note 376, at 19395.
386. Puerto Rico Plan Called a Success, N.Y. TIMES, Oct. 2, 1949, at F9.
387. See Puerto Rico Reports Boom in All Lines, CHI. TRIB., Jan. 8, 1961 at B38 (celebrating a
ten percent gain in GDP in 1960 and a sixteen percent rise in manufacturing).
388. Joseph Egelhof, Refugee Family Builds Fortune in Puerto Rico, CHI. T RIB., Apr.
24, 1972, at C9.

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Operation Bootstrap succeeded because it was the natural and


obvious response to U.S. tax and economic policies, and indeed, the
only possible path forward for the island following centuries of
colonial policies that arrested the development of local enterprise.
In essence, it was an example of a phenomenon cynically acknowledged
by Professor Frank Bonilla: [a] Puerto Rican solution is one in which
what looks inevitable is transformed into a national project. 389
Despite the early and remarkable successes, not everyone
celebrated Operation Bootstrap.
Soon after the program
commenced, mainland politicians and commentators began to take
notice of the extremely preferential tax treatment afforded to
companies doing business in Puerto Rico. Writers for the New York
Times declared in 1956 that the island was nothing more than a tax
haven, listing it alongside other notorious low-tax regimes. 390 To
such accusations, Muoz Marn responded that the program was
intended to be an example of self help, and that [t]ax exemption
is not the lure. 391 Rather, he argued that Puerto Ricos reasonably
low production costs, cheap transportation for raw materials from the
entire Western Hemisphere, [and] an abundance of [skilled] labor
were drawing U.S. corporations to the island. 392
These explanations did little to quell mainland criticisms, however.
Increased importation of foreign products and materials in the
1950salong with a corresponding rise in offshoring of U.S. business
processesfurther amplified concerns that U.S. workers were being
displaced and that Puerto Ricos successes came at the expense of
mainland productivity. 393 Although the U.S. government seemed to
be turning a blind eye to aggressive tax planning maneuvers by U.S.

389. Frank Bonilla, Beyond Survival: Por Qu Seguimos Siendo Puertorriqueos, in IRIS
M. ZAVALA & RAFAEL RODRGUEZ, THE INTELLECTUAL ROOTS OF INDEPENDENCE: AN
ANTHOLOGY OF PUERTO RICAN POLITICAL ESSAYS 360 (1980).
390. See Burton Crane, Tax Havens Draw Many Companies: U.S. Corporations and Some
Individuals Rush to Set Up Concerns Abroad, N.Y. TIMES, Aug. 19, 1956, at 135 (comparing
Puerto Ricos tax policies with other countries like Liberia that have no currency of their
own and provide extraordinary tax preferences for U.S. corporations).
391. Puerto Rico Plan Called a Success, N.Y. TIMES, Oct. 2, 1949, at F9.
392. Id.
393. See Many Ghost Town Residents Have Moved to Other Jobs or Returned to Farming,
N.Y. TIMES, Nov. 1, 1953, at F1 (describing job losses and generalized economic
plight in Park City, Utah, as the domestic lead-zinc mining industry collapsed under
the pressure of cheaper metal imports); Industries Oppose Imports Program, N.Y. TIMES,
Apr. 14, 1950, at 16 (reporting protests against increased imports of products
manufactured in Marshall Plan nations).

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corporations doing business in Puerto Rico, 394 the American public


was growing increasingly sensitive to the economic distortions created
by generous tax incentives on the island. In 1964, a writer of an
opinion editorial in the Chicago Tribune complained that Operation
Bootstrap was not only a giveaway, but also that it d[id] violent
injury to us at home . . . [took] away jobs of our people, . . . [and]
subsidize[d] the flight of factories out of this country. 395 Moreover,
as Puerto Rican migration to the mainland reached its peak in the
1950s and 1960s, mounting ethnic and racial tensions in urban
America only amplified existing prejudices toward Puerto Ricans. 396
Protests against excessive tax breaks in Puerto Rico continued well
into the 1970s, culminating in a series of official complaints launched
by the American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO). 397 In 1973, the House Ways and Means
Committee responded by conducting a series of hearings on
potential revisions to the U.S. Tax Code. 398
Meanwhile, an emergent international awareness of the dangers of
unfair tax competition 399and a corresponding growth in abusive tax
planning practicesled U.S. officials to turn a more skeptical eye
toward corporations claiming the benefits of section 931. The
Internal Revenue Service became concerned that U.S. corporations
were increasingly shifting expenses to Puerto Rican affiliates in order
to reduce their U.S. tax liabilities. 400 The Internal Revenue Service

394. See Rev. Proc. 63-10, 1963-1 C.B. 490 (providing that, if under all facts and
circumstances, intangible assets belong to a possessions corporation, then the
possessions corporation is entitled to the income attributable to such intangible assets).
395. M.R.F., Puerto Ricos Bootstrap, CHI. TRIB., Sept. 21, 1964, at 20.
396. See generally CLARA A. RODRGUEZ, PUERTO RICANS: BORN IN THE U.S.A. (1989)
(exploring the effect of U.S. colonialism on Puerto Rican immigration); JOS RAMN
SNCHEZ, BORICUA POWER: A POLITICAL HISTORY OF PUERTO RICANS IN THE UNITED
STATES (2007) (questioning why the increase of the Puerto Rican and Hispanic
populations in the United States has not granted commensurate power).
397. See Adam H. Rosenzweig, Why Are There Tax Havens?, 52 W M. & MARY L.
R EV. 923, 92325 (2010) (detailing the public outrage and attempts by Congress
to curtail tax havens).
398. STAFF OF J. COMM. ON INTERNAL REVENUE TAXATION, 93RD CONG., SUMMARY OF
TESTIMONY OF PANELISTS ON TAX REFORM TOPICS 12 (Comm. Print 1973) (receiving
proposals for alternative methods of dealing with tax avoidance and tax havens).
399. See Rosenzweig, supra note 397, at 923 (describing how legislative and
political efforts to combat tax havens have exacerbated the problem).
400. Zoltan M. Mihaly, Tax Advantages of Doing Business in Puerto Rico, 16 STAN. L.
REV. 75, 75 (1964) (suggesting strategic tax avoidance through Puerto Rican law can
yield zero tax liability).

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commenced a series of investigations, but called off the initiative in


response to pleadings from Puerto Rican officials. 401
Nonetheless, by the mid-1970s, the second stage of U.S. tax
imperialism in Puerto Rico came to an inevitable end. The economic
successes of Operation Bootstrap began to taper off in the early
1970s, and by 1976, one journalist declared that the Commonwealth
[wa]s in serious economic trouble. 402 History had demonstrated that
the role the United States carved for Puerto Ricoto be a domestic
tax haven and lower-cost provider of manufacturing inputs for U.S.
corporationswas short-lived. Globalization, along with increasing
sophistication and competition in corporate tax planning, meant that
U.S. companies desiring to remain competitive would need to look
beyond the U.S. flag altogether to locate their operations and source
lower-cost inputs. 403 And, although Puerto Rico would continue to
serve capital-intensive U.S. industries for several more decades, it was
clear by the 1970s that the manifest destiny of more labor-intensive
U.S. industries was to march further across the globe, where wages
were more depressed and regulations less constricting. 404 As the
following section explains, U.S. policies once again shifted,
introducing the third stage of U.S. tax imperialism in Puerto Rico.
C. Stage Three of U.S. Tax Imperialism in Puerto Rico, 1975Present
In the third stage of U.S. tax imperialism in Puerto Rico, which
commenced in 1975 and continues to the present day, the United
States has struggled to prevent further accumulation of U.S. capital in
Puerto Rico. As international capital markets have rapidly developed
and expanded, and as methods of corporate tax planning have grown
more sophisticated, U.S. tax policies have abruptly shifted. The
current policies try to facilitate corporate wealths free flow from
Puerto Rico back to the mainland, in an effort to prevent further
erosion of the U.S. tax base. Unfortunately, this means that the
United States and its island colony have been engaged in a struggle
over capitalthe very resource that Puerto Rico needs most, but for
which it is left wholly reliant on the United States to obtain.
401. SUREZ, supra note 235, at 31.
402. David Vidal, Deepening Troubles in Puerto Rico: Operation Bootstraps Gains Are
Shrinking, N.Y. TIMES, Feb. 15, 1976, at F1.
403. See id. (detailing how Puerto Ricos relatively high minimum wage put it in
direct competition with the Eastern Caribbean, Africa, and Asiacountries with
much cheaper labor).
404. See id. (Factories keep coming, especially in drugs and electronics, but not as
fast and they arent the labor intensive plants of the past.).

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Initially, the struggle centered upon a perceived loophole in the


federal tax treatment of corporations engaged in business in U.S.
possessions. Under the U.S. Tax Code, corporate dividends that
related to income excluded from gross income under section 931
were not eligible for the intercorporate dividends received
deduction. 405 But, because section 931 corporations were considered
domestic corporations for the purposes of the U.S. Tax Codes
subsidiary liquidation provisions, the eventual liquidation of the
possession corporation was treated as a nonrecognition event. 406
This legal milieu basically incentivized U.S. corporations to
accumulate their profits, either in the possessions or in other foreign
jurisdictions, until they were ready to liquidate the section 931
corporation. For Puerto Rico, the accumulation of capital was a winwin for everyone, as one trade consultant explained. 407 All of the
billions of dollars stayed in Puerto Rico, and the banks lent out the
profits. 408 But as the mainland economy faltered, the United States
came to view repatriation of . . . corporate earnings [accumulated in
the possessions or abroad because of section 931] as a possible
stimulus to the mainland economy, even though the possessions had
come to rely upon these badly needed investment funds. 409 In a
1975 report to Congress, the staff of the Joint Committee on Internal
Revenue Taxation summarized the problem thusly:
Because no current U.S. tax is imposed on the earnings if they are not
repatriated, the amount of income [that] accumulates over the years
from [business activities in the possessions] can be substantial. The
amounts [that] may be allowed to accumulate are often beyond what
can be profitably invested within the possession where the business is
conducted. As a result, corporations generally invest this income in
other possessions or in foreign countries either directly or through
possessions banks or other financial institutions. 410

405. See 26 U.S.C. 246(a)(2)(B) (1974).


406. 26 U.S.C. 332; see 26 U.S.C. 1504(b)(4) (prohibiting corporations
receiving benefits under section 931 from inclusion in the consolidated return of an
affiliated group of corporations). Nonrecognition means that no gain or loss is
recognized to the parent as a result of the subsidiary liquidation.
407. Can Puerto Rico Reinvent Itself as a Global Competitor?, KNOWLEDGE@WHARTON
(Aug. 22, 2012), http://knowledge.wharton.upenn.edu/article/can-puerto-ricoreinvent-itself-as-a-global-competitor.
408. Id.
409. Vidal, supra note 402.
410. STAFF OF JT. COMM. ON INTERNAL REVENUE TAXATION, U.S. TAXATION OF
FOREIGN SOURCE INCOME OF INDIVIDUALS AND CORPORATIONS AND THE DOMESTIC
INTERNATIONAL SALES CORPORATION PROVISIONS, PREPARED FOR THE USE OF THE

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Pursuant to the Tax Reform Act of 1976, 411 Congress revised the
U.S. Tax Code, purportedly to provide for a more efficient system of
exempting possessions corporations from income taxation. 412 In
place of the exemption mechanism previously codified, Congress
enacted a new provision (codified as section 936) enabling U.S.
corporations to elect to receive a tax credit equal to the portion of U.S. tax
liabilities attributable to taxable income from sources outside the United
States that relate to the active conduct of a trade or business within a U.S.
possession and from qualified possession-source investment income.413
Qualified possession-source income was defined to mean income derived
from the investment of accumulated trade or business profits in the same
possession as the trade or business is conducted. To receive the tax
credit under the initial formulation of section 936, a U.S. corporation
must have earned at least eighty percent of its gross income for the
three-year period immediately preceding the close of its taxable year
from sources within a U.S. possession, with at least fifty percent of
such earnings from the three previous years derived from active
income earned in U.S. possessions.414 In this way, section 936 was in the
nature of a tax sparing mechanism, since it allow[ed] a tax credit
regardless of the amount, if any, that the 936 corporation pa[id] in
possession income taxes.415 In other words, the new provision was similar
in effect to its predecessor, section 931.416 Because the credit was not
contingent upon actual foreign taxes paid, it preserved the economic
effect to the corporation of any tax incentives offered by the possession.
Finally, to encourage repatriation of accumulated earnings,
Congress also amended the U.S. Tax Code to allow parent companies
to claim a 100% dividends-received deduction with respect to income

COMMITTEE ON WAYS AND MEANS 14 (Comm. Print 1975).


411. Pub. L. No. 94-455, 1051, 90 Stat. 1643 (1976).
412. See Coca-Cola Co. v. Commr of Internal Revenue, 106 T.C. 1, 2123 (1996),
abrogated by Sunoco, Inc. v. Commr of Internal Revenue, 118 T.C. 181 (2002)
(providing background regarding the purposes of revising the U.S. Tax Code and
the subsequent benefits for corporations).
413. 1051(c), 90 Stat. 1520, 164347.
414. Id.; see BUCKLEY, JR., supra note 326, at 35, and accompanying text (discussing
the eighty and fifty percent provisions carried over from the predecessor statute).
415. Juan C. Mendez-Torres, The Internal Revenue Codes Role in Puerto Ricos
Economic Development, J. INTL TAXN, Feb. 2004, at 29; see Andrew E. Gerow,
Comment, Shooting for the Stars (and Stripes): How Decades of Failed Corporate Tax Policy
Contributed to Puerto Ricos Historic Vote in Favor of Statehood, 88 TUL. L. REV. 627, 64041
(2014) (providing a thorough explanation of tax sparing, along with an example).
416. See supra notes 32324; 37475 and accompanying text (demonstrating the
similar tax preferences that corporations could receive under section 931).

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earned in a U.S. possession. 417 At least in the short-term, the change


in federal law achieved its intended effect. The U.S. Treasury
reported that there ha[d] been a clear response in the repatriation
of earnings.418 Before 1977, possession corporations paid virtually no
dividends to their U.S. parents. In tax years 1978 to 1980, however,
possession corporations in manufacturing distributed dividends of $885
million, $905 million, and $1,215 million, respectively.419 Nonetheless,
the federal government remained concerned about the many more
billions of retained earnings still in the possessions. 420
Because this latter amendment encouraged the outflow of badlyneeded investment capital, the Puerto Rican government responded
defensively in 1976 with significant updates to a decades-old provision
of the islands own revenue code. 421 Under existing law, when a
possessions corporation paid a dividend to its U.S. parent
corporation from earnings and profits derived from hotel,
manufacturing, or shipping activities, it was required to withhold
fifteen percent of the dividend and pay this amount as a tax to the
Puerto Rican government. 422 But dividends paid out of industrial
incentives income to nonresident shareholders were exempt from the
tax to the extent such shareholder was not required to pay income
tax in any other jurisdiction on income from activities in Puerto Rico,
or to the extent such shareholder was unable to claim a deduction or
credit for any taxes paid in Puerto Rico. 423 All other dividends were
subject to twenty-five percent withholding. 424
These exclusions meant that most dividends paid to U.S.
companies by section 931 corporations would not be subject to the
so-called tollgate tax. But, even without these exclusions, until
1976, the Puerto Rican tax would have been wholly irrelevant to U.S.
firms. Under prior federal tax law, U.S. firms had far greater reasons
to avoid repatriation of their earnings: these intracompany dividends
would be subject to federal income taxes. However, the 1976 revision
to the federal dividends-received deduction removed the tax

417. 1051, 90 Stat. 1520, 1643.


418. U.S. Treasury Dept., Impact of Changing From Section 931 to Section 936 and of
Changes in the Puerto Rican Tollgate Tax and Industrial Incentives Program, 9 INTL TAX J.
445, 445 (1983).
419. Id.
420. Id. at 446.
421. See 1956 P.R. Laws 474, 796, 858.
422. See Ralph J. Sierra, Jr., The Puerto Rico Tollgate Tax, 4 INTL TAX J. 824, 825 (1978).
423. See 1963 Industrial Incentive Act, 1963 P.R. Laws 12022, 14243.
424. Sierra, supra note 422, at 825.

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disincentive. By extending the Puerto Rican tollgate tax to apply to


the repatriated earnings of section 936 corporations, Puerto Rico
ensured that there would still be a major tax disincentive for U.S.
firms desiring to repatriate earnings. 425 Put simply, the Puerto Rican
tollgate tax was irrelevant before, because federal tax law gave firms
all the reason they needed to keep their money in Puerto Rico. But,
once the federal government amended its laws to allow for tax-free
dividends, there was a real threat that companies would transfer the
wealth back to the U.S. mainland in the form of intracompany
dividends. The Puerto Rican tollgate tax was an attempt to put back
up some sort of barriera tax that would incentivize firms to leave
their money in Puerto Rico.
Although the move clearly had the potential to alienate U.S.
investors, Puerto Rican officials were encouraged by a growing
economic nationalism movement in Latin America, pursuant to
which Latin American nations attempted to restrict the repatriation
of profits earned within their borders by foreign investors. 426 Thus, in
1976 legislation, the Puerto Rican government expanded the tollgate
tax by repealing the exclusion for industrial incentives income. At the
same time, the Puerto Rican government lowered the rate of the
tollgate tax from fifteen to ten percent for dividends relating to hotel,
manufacturing, or shipping activities, or from industrial development
income. 427 Special provisions allowed for reduced rates of taxation to
the extent that the company made corresponding investments in
designated Puerto Rican assets, which included deposits in Puerto
Rican banks and investments in Puerto Rican bonds and mortgages. 428
Meanwhile, the 1976 revisions to the U.S. Tax Code were not
enough to quell concerns on the mainland. The federal government
became increasingly wary that section 936 encouraged the shifting of
high-value intangible assets to the possessions, allowing large portions
of corporate profits to be artificially attributed to section 936
corporations 429 and leading to deferral of federal income taxes. 430

425. Tax Reform Act of 1976, Pub. L. No. 94-455, 1051, 90 Stat. 1520, 1643 (1976).
426. See Joseph J. Jova et al., Private Investment in Latin America: Renegotiating the
Bargain, 19 TEX. INTL L.J. 3, 1122 (1984) (describing how Latin America shifted
from a passive to an active posture at the investment bargaining table).
427. P.R. LAWS ANN. tit. 13, 3231 (1977).
428. See U.S. GEN. ACCOUNTING OFFICE, GAO-97-101, TAX POLICY: PUERTO RICAN
ECONOMIC TRENDS 3 (1997) (describing the tollgate tax).
429. The U.S. parent corporation could simply transfer its intangible property to
the section 936 corporation in a tax-free transfer under 26 U.S.C. 351 (2012). See,
e.g., Eli Lilly & Co. v. Commr of Internal Revenue, 856 F.2d 855, 858 & n.2 (7th Cir.

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Congress also remained concerned that companies could reduce their


U.S. tax liabilities by artificially inflating the sale price for finished
products transferred from section 936 corporations to affiliates for
distribution in the United States and elsewhere. The Internal Revenue
Service began to more aggressively police transactions that violated the
spirit of federal tax laws. 431 Over the next few decades, Congress made
a number of technical revisions to the U.S. Tax Code to make these
practices more difficult. 432 But, these changes did little to appease
critics of section 936. Moreover, contrary to the preliminary data,
reporting by the U.S. Treasury in the early 1980s revealed that U.S.
firms were in fact continuing to retain billions of dollars in Puerto
Rico, rather than repatriating to the mainlandlikely due to the new
incentive effects of the Puerto Rican tollgate tax. 433
1988), affd in part and revd in part, 856 F.2d 855 (7th Cir. 1988) (describing a
transaction of this sort under 26 U.S.C. 351 where a parent corporation claimed
nonrecognition treatment after transferring two patents and proprietary information
to its section 936 subsidiary in exchange for stock in that subsidiary). Similarly, the
U.S. parent corporation could transfer cash to the section 936 corporation and then
direct it to acquire potentially valuable intangible property from unrelated third
parties. Alternatively, the U.S. parent corporation could enter into a license
agreement granting the section 936 corporation the exclusive or nonexclusive right
to use its intangibles in exchange for royalty payments. Of course, intercompany
transactions of this sort remained subject to the arms length standard codified in 26
U.S.C. 482, but enforcement of this provision required aggressive policing and
contentious audits. See, e.g., Yariv Brauner, Value in the Eye of the Beholder: The
Valuation of Intangibles for Transfer Pricing Purposes, 28 VA. TAX REV. 79, 95104 (2008)
(examining the arms length standard for transfer valuation).
430. See Merck & Co. v. United States, 24 Cl. Ct. 73, 91 (1991) (explaining such
concerns in the specific context of finding that Merck & Co. had retained earnings
of 98.82 percent of all reported taxable income and that such profits were due to
the disparity between cost of production and the supply price).
431. See, e.g., I.R.S. Priv. Ltr. Rul. 80-40-019 (July 7, 1979), reprinted in 2 WILLIAM C.
GIFFORD & ELISABETH A. OWENS, INTERNATIONAL ASPECTS OF U.S. INCOME TAXATION: CASES
AND MATERIALS 34651 (1982) (finding that the transfer of income-producing intangibles
should not allow for the shifting of income between parent and subsidiary corporations).
432. Changes included, among other things, increasing the percentage of a
section 936 corporations gross income that must be derived from the active conduct
of business, and introducing mechanisms to allocate to the mainland parent
corporation the income from intangibles developed by the parent but used by the
section 936 subsidiary. See Eduardo Jose Fernandez, Note, La Isla del Escape: Americas
Escape from Corporate Taxes & Puerto Ricos Taxed Future, 19 FLA. J. INTL L. 311, 31822
(2007) (reviewing the various amendments and modifications to section 936); BORIS
I. BITTKER & JAMES S. EUSTICE, FEDERAL INCOME TAXATION OF CORPORATIONS &
SHAREHOLDERS 15.22 (2015) (referencing the historical changes). See generally
Lorraine Eden, Puerto Rican Transfers and Section 936, 9 TAX NOTES INTL 37 (1994)
(detailing changes made to section 936 through 1993).
433. U.S. DEPT OF THE TREASURY, THE OPERATION AND EFFECT OF THE POSSESSIONS

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Puerto Rico remained highly dependent on this large


accumulation of U.S. investment capital. A report by the Reserve
Bank of New York would later explain that accumulated earnings
from section 936 corporations provided key support to bank
liquidity from the late 1970s to the late 1990s, representing almost
[thirty-five] percent of total bank liabilities in 1995.434 As Congress
searched for ways to close the loopholes in federal law, and as mainland
politicians repeatedly threatened to repeal section 936 altogether, 435 the
Puerto Rican government and U.S. firms alike struggled to retain federal
tax incentives and U.S. direct investments in Puerto Rico.436
It was in the context of this policy debate that a new explanation
for federal tax policies toward Puerto Rico was born. U.S. lawmakers
began to assert that federal tax incentives for corporations doing
business in the possessions were intended to provide economic
stimulus in the possessions. 437 Federal reports evaluating section 936
classified potential beneficiaries of the tax expenditure as belonging
to either capital-intensive or labor-intensive industries, suggesting
that the legislative intent had been to encourage labor-intensive
industries to relocate to Puerto Rico to create jobs and stimulate the
island economy. However, the benefits were primarily flowing to
capital-intensive industries, such as pharmaceutical and electronics
companies, meaning that the policy initiative had failed. But, this
account stands in direct contrast to the historical reality, which is that
the federal government had initially set out to create domestic tax
havens in the possessions to benefit U.S. corporations, without regard
to the capital- or labor-intensive nature of the industry. Of course,
the fictional account better served the immediate needs of mainland
politicians; by characterizing federal tax policies as charitable and
beneficent, lawmakers could convince each other and the American
public that the tax benefits ought to be rescinded to the extent they
presently fail to satisfy those aims. Further, by implying that the United
States had been historically motivated by altruistic goals, lawmakers
could essentially blame Puerto Rico itself for becoming a tax haven.
CORPORATION SYSTEM OF TAXATION, FOURTH REPORT 155 (1983).
434. FED. RES. BANK OF N.Y., REPORT ON THE COMPETITIVENESS OF PUERTO RICOS
ECONOMY 15 (2012).
435. See generally SUREZ, supra note 235, at 41129 (providing an historical
overview of, and describing the various legislative threats to, section 936).
436. Id.
437. See U.S. G EN. A CCOUNTING O FFICE, GAO-97-101, T AX POLICY: P UERTO
R ICAN E CONOMIC T RENDS 1 (1997) (articulating the changed explanation of the
federal tax incentives).

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Nonetheless, some observers recognized that the struggle was really


over large accumulations of capital and a dwindling U.S. corporate
tax base, rather than failed attempts to provide economic stimulus to
less developed colonial possessions. A 1985 New York Times opinion
criticized lawmakers for essentially pitting U.S. economic interests
against those of its colony. 438 The column further derided U.S.
lawmakers for failing to acknowledge the degree of capital mobility in
the modern economy: [t]he Treasury seems to assume that those
businesses would remain in its jurisdiction. Experience argues they
will move elsewhere, probably Asia. 439
Indeed, these warnings were based on more than mere conjecture.
A leading tax attorney suggested in a 1995 article that U.S.
corporations concerned about the potential repeal of section 936
should consider expatriating their operations entirely by conducting
business in Puerto Rico through controlled foreign corporations. 440
Operating through a controlled foreign corporation was and
continues to be particularly attractive because it allows for deferral of
federal income tax liabilities to the extent a company qualifies for the
manufacturing exception to anti-deferral laws codified in subpart F of
title 26 of the U.S. Code. 441 The U.S. Treasury initially assumed that
firms that previously enjoyed the benefits of section 936 would be
unwilling to transfer highly valuable intangible assets to controlled
foreign corporations because of the high current tax costs associated
with this move; instead, the U.S. Treasury believed most firms would
enter into arms length licensing arrangements, pursuant to which the
controlled foreign corporation would make fully taxable payments to
the parent in exchange for the right to use its intangible property.442
438. Opinion, Tax Reforms Sting in Puerto Rico, N.Y. TIMES, July 20, 1985.
439. Id.; see also Anne Swardson, Puerto Rico Supports Tax Credit, WASH. POST (May 1,
1985), http://www.washingtonpost.com/archive/business/1985/05/01/puerto-ricosupports-tax-credit/979afb82-74c6-450a-aaa8-dfa47b48be38/ (making a similar
observation, warning that [m]any U.S. companies would pack up and leave,
relocating principally to cheap-labor regions such as the Pacific Basin).
440. G. Marshall Abbey, Expatriation as an Alternative to Operating Under Section
936, 6 J. INTL TAXN 493, 493 (1995). A controlled foreign corporation is any
foreign corporation to the extent that more than fifty percent of the total combined
voting power of classes of stock entitled to vote, or of the total value of the stock, is
owned by U.S. shareholders on any day during such corporations taxable year. 26
U.S.C. 957(a) (2012).
441. See 26 U.S.C. 954(e)(2) (describing the manufacturing exception).
442. JOINT COMM. ON TAXATION, JCX-24-06, AN OVERVIEW OF THE SPECIAL TAX RULES
RELATED TO PUERTO RICO AND AN ANALYSIS OF THE TAX AND ECONOMIC POLICY
IMPLICATIONS OF RECENT LEGISLATIVE OPTIONS, 910, 83, 92 (2006),
http://www.jct.gov/x-24-06.pdf.

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In the end, American lawmakers prevailed in the battle against


Puerto Rico, although it does not appear that the spoils of victory
ever actually passed to the United States (not to suggest, of course,
that they remained with Puerto Rico). In 1996, Congress enacted
section 30A, repealing section 936 and establishing a ten-year
transitional period, during which the section 936 credit remained
available only for taxpayers who had claimed it in previous years. 443
In the years following the repeal, many section 936 corporations
doing business in the pharmaceutical sectorwhich controlled the
largest amount of accumulated capital in Puerto Ricoconverted to
controlled foreign corporations, thereby maintaining preferential
positions under federal and Puerto Rican tax law. 444 For instance, in
1998, the large U.S. pharmaceutical firm OMJ Pharmaceuticals
transferred three of its wholly-owned subsidiaries doing business in
Puerto Rico to an Irish corporation also owned by OMJ. 445 Much to
the U.S. Treasurys frustration, companies avoided the substantial
federal tax liabilities associated with deemed asset sales not by
entering into arms length licensing agreements, but by entering into
pre-conversion cost-sharing and research partnership arrangements. 446
As a result, conversions to controlled foreign corporations were not only
achieved on an almost entirely tax-free basis, but they also succeeded in
placing large capital accumulations further beyond the U.S. Treasurys
reach. 447 Finally, as evidenced by the U.S. Treasurys newest battle

443. Small Business Job Protection Act of 1996, Pub. L. No. 104-188, 1601, 110 Stat.
1755, 1827. Certain additional restrictions were imposed, including placing a cap on the
profits that could be sheltered by the tax-sparing credit accorded by section 936 and
placing a restriction on bringing new products under the coverage of that credit. See id.
110 Stat. at 1827, 1830 (implementing restrictions on existing credit claimants).
444. See A.W. Maldonado, The Loss of 936: Good or Bad for Puerto Rico?, PHARM.
INDUS. ASSN OF P.R. (Nov. 17, 2002), http://www.piapr.org/index.php?src=
gendocs&ref=lossof936& (stating that forty-one percent of the industry converted
from section 936 corporations to controlled foreign corporations).
445. OMJ Pharm., Inc. v. United States, 753 F.3d 333, 33536 (1st Cir. 2014).
446. See U.S. GOVT ACCOUNTABILITY OFF., GAO-06-541, PUERTO RICO: FISCAL
RELATIONS WITH THE FEDERAL GOVERNMENT AND ECONOMIC TRENDS DURING THE
PHASEOUT
OF
THE
POSSESSIONS
TAX
CREDIT
8990
(2006),
http://www.gao.gov/new.items/d06541.pdf (describing how controlled foreign
corporations avoided tax liability after the phasing out of 25 U.S.C. 936 through
cost-sharing and research agreements); see also Treas. Reg. 1.482-2(d)(4) (1969)
(allowing for cost-sharing arrangements to jointly develop intangible property). To
the extent the possession corporation substantially contributed to the creation of
intangible property in connection with its trade or business in the possession, it
would be the developer of the intangible property under section 1.482-2(d)(1)(c).
447. Maldonado, supra note 444.

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against these so-called tax inversionsthe process of changing a


corporations legal address to avoid taxesthe fight to retain large
accumulations of capital and to preserve the U.S. corporate tax base now
extends far beyond the shores of Puerto Rico. 448
Meanwhile, commentators have spilled much ink on the effects of
section 936s repeal on the Puerto Rican economy. With many
manufacturing firms choosing to withdraw entirely from the island,
Puerto Rico had registered double-digit unemployment by the early
2000s. 449 A 2012 report by the Federal Reserve Bank of New York
cited a sixteen percent unemployment rate, an extremely low labor
participation rate, and a shrinking real GNPa measure that tracks
the amount of income actually accruing to island residents, as
opposed to the numerous large foreign corporations still doing
business there. 450 In essence, the repeal of section 936 exposed the
structural problems introduced by centuries of colonial rule, which had
been etched into Puerto Ricos fiscal and economic foundation through
the groundwork laid in the first two stages of U.S. tax imperialism. 451
Namely, the island suffered from a dearth of local enterprise and
investment capital, leaving it wholly reliant on external investment.452
Although many large corporations in the pharmaceutical sector
continue to do business on the island through controlled foreign
corporations, these are not labor-intensive businesses, and thus they
have not had a meaningful impact on employment for the islands
population. 453 Moreover, these operations no longer amass large
amounts of investment capital in Puerto Rico. Owing to the
emergence of more sophisticated tax planning strategies,
corporations are able to shift capital for use by mainland affiliates

448. See, e.g., Jesse Drucker, Inversions Are Often Last Stop for Avoiding U.S. Taxes,
BLOOMBERGBUSINESS (Dec. 18, 2014, 7:15 AM), http://www.bloomberg.com/news/
articles/2014-12-12/inversions-are-often-last-stop-for-companies-avoiding-u-s-taxes
(examining ongoing litigation between the IRS and large pharmaceutical companies
such as Medtronic, Inc., Covidien Plc, Eaton Corp., Abbott Laboratories, and
Ingersoll-Rand Plc over tax credits applied to subsidiaries in low-tax jurisdictions
including the Cayman Islands, Luxembourg, and Bermuda).
449. See Ivan Roman, Island Asks Congress for Help, ORLANDO SENTINEL (May 28,
2001), http://articles.orlandosentinel.com/2001-05-28/news/0105280087_1_puerto-ricocalderon-tax-incentive (citing Puerto Ricos 11.2% unemployment rate in April 2001).
450. FED. RES. BANK OF N.Y., supra note 434, at 45.
451. See supra Parts II.AB (examining the first two stages of U.S. tax imperialism).
452. See supra notes 43336 and accompanying text.
453. See supra notes 43336 and accompanying text (finding that pharmaceuticals
remain the islands largest manufacturing industry, though the industry and
employment opportunities are shrinking).

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without exposing the principal to immediate U.S. income taxation. 454 In


essence, the assets and gains that todays multinational firms attribute to
their subsidiaries doing business in Puerto Rico are mere accounting
entries. For reasons such as these, the authors of the Federal Reserve
Bank of New York report warned that the island should lessen its
dependence on the pharmaceutical industry that continues to operate
there: [g]oing forward, there appears to be only a limited prospect for
the [pharmaceutical] sector to be a driver of growth.455
D. Recent Fiscal Developments in Puerto Rico
In recent years, the Commonwealth has struggled not only to
attract new business and much-needed capital, but also to collect
sufficient tax revenues to support government operations, leading to
heavy borrowing to fund government operations. But, even in the midst
of this economic crisis, there have been some promising new
developments, which offer some hope for the islands economic future.
Most notably, the government appears to be using normal political
processes to restore legitimacy to its tax laws. In 2006, the
government exercised its constitutional authority to impose and
collect taxes 456 by enacting a sales and use tax, 457 with the proceeds
shared between the central and municipal governments. In 2014, a
writer for BusinessWire reported promising results, finding that sales
tax collections were up and had increased [t]otal sales tax revenue
[by] 6.5% year-over-year through May 2014. 458 Nonetheless, the
government still struggles with low rates of overall compliance with
the sales and use tax, 459 reflecting the challenges of introducing new
taxes on the island. In a recent and highly publicized move, the
Puerto Rican government announced that it will abandon the sales
454. For instance, large corporations use intercompany investment and loan
techniques to shift capital without exposing the principal to current U.S. income
taxation. See, e.g., Maxwell Murphy, Hasbro Weighing Repatriation Tax Strategies, WALL
ST. J. (Apr. 22, 2013), http://blogs.wsj.com/cfo/2013/04/22/hasbro-weighingrepatriation-tax-strategies (discussing the tax implications for Hasbros potential
repatriation of $1.1 billion in overseas cash).
455. FED. RES. BANK OF N.Y., supra note 434, at iii.
456. P.R. CONST. art. VI, 2.
457. 2006 P.R. Laws 1231.
458. Fitch Downgrades Puerto Rico GO, Sales Tax, Retirement System & Water Revenue
Bonds, BUSINESSWIRE (July 9, 2014, 7:06 PM), http://www.businesswire.com/news/
home/20140709006332/en/Fitch-Downgrades-Puerto-Rico-Sales-Tax-Retirement.
459. See Kaske, Puerto Rico Seen Collecting Up to $6.7 Billion From Proposed Tax, supra
note 308 and source cited therein (citing a KPMG report that found the Puerto Rican
tax system overly burdensome with a tax compliance rate of only fifty-six percent).

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and use tax in 2016, replacing it with a value added tax regime. 460
Many Puerto Ricans objected to this proposal even in its earliest
stages, 461 suggesting that it, too, will be a challenge to implement.
But, at the very least, the Puerto Rican governments
experimentation with new and additional forms of taxation suggests
that it has the power to make fiscal choices and the autonomy to look
beyond U.S. modes of taxation, even exploring value added tax
regimes that have been used by other governments across the globe.
Meanwhile, the way that certain taxes left over from the U.S.
military regime are presently imposed suggests that these vestiges of
colonial rule continue to inflict the effects of political illegitimacy.
For instance, although the government continues to collect property
taxes, it has not conducted a real property assessment since 1958.
Accordingly, the tax is imposed on the assessed values of real
property as recorded in the 19571958 fiscal year. When coupled
with rather generous principal residence exemptions, this means that
the effective rate of taxation is much lower when compared to
property taxes imposed on the mainland, with many owners having
zero tax liability. 462 However, in times of financial exigency, such as
during the recent economic recession, the government has imposed
special property tax assessments to increase revenues.463 In such
cases, the government simply imposes an additional percentage tax
beyond the regular property tax. 464

460. 2015 P.R. Laws No. 72, http://www.oslpr.org/2013-2016/leyes/pdf/ley-72-29May-2015.pdf (providing for, among other things, a temporary, increased rate of
sales and use taxation, and a new value-added tax regime to take its place in 2016);
see also Kaske, Puerto Rico Seen Collecting Up to $6.7 Billion From Proposed Tax, supra note
308 and accompanying text (discussing the value-added tax proposal prior to its
legislative adoption); Michael Oleaga, Puerto Rico Economy News: Governor Alejandro
Garcia Padilla Proposes Tax Overhaul, Potential Billion Dollar Revenue Projected, LATIN POST
(Feb. 13, 2015, 1:09 PM), http://www.latinpost.com/articles/37481/20150213/
puerto-rico-economy-news-governor-alejandro-garcia-padilla-proposes-tax.htm
(presenting Governor Garcia Padillas February 2015 proposal of a value-added tax).
461. See, e.g., AP, Puerto Rico Prepares to Debate Value-Added Tax Proposal, DAILY MAIL (Feb.
11, 2015, 6:46 PM), http://www.dailymail.co.uk/wires/ap/article-2950006/Puerto-Ricoprepares-debate-value-added-tax-proposal.html (articulating the major arguments made
by Puerto Rican economic stakeholders for and against the proposal).
462. See Alm, supra note 307, at 38082.
463. Special property taxes are authorized pursuant to Puerto Rico Act 83 of 1991.
See 1991 P.R. Laws 702. A special assessment of this sort was imposed in 2009. See
2009 P.R. Laws 77 (implementing the Special Act to Declare a State of Fiscal
Emergency and to Establish a Comprehensive Fiscal Stabilization PlanCreation to
salvage the credit of Puerto Rico).
464. See 2009 P.R. Laws 77 (imposing a special tax on real property used for

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The lack of regular assessments, along with the occasional


imposition of special assessments, suggests that the island still
struggles to fully integrate U.S. modes of property taxation. At the
same time, in light of the governments ongoing fiscal crisis, Puerto
Rico has not been able to abandon the tax altogether. It may be
beneficial for the government to engage in a systematic review of the
property tax and determine whether to maintain or repeal the law,
and, if the former, whether and how to modernize it. By subjecting
this tax to the islands normal political process, the government may
be able to legitimize and improve upon its legal foundation. Then,
regular assessments and rate adjustments can be made in accordance
with economic and fiscal needs.
While using the normal political process to make gradual changes
to the tax laws will help advance the popular legitimacy of the islands
overall system of taxationand thus improve tax morale and increase
collections over timesuch changes are unlikely to fully address the
islands more immediate revenue needs.
Accordingly, the
Commonwealth passed Act 154 in 2010, imposing an excise tax on
products manufactured on the island by companies headquartered
elsewhere. 465 This tax became effective in January 2011 and was
originally designed to be phased out over six years. 466 However, in
2013, the Commonwealth amended the law, imposing the highest
rate for the years 2013 through 2017. 467 Of course, the new excise tax
has been severely criticized by mainland media 468 and by Puerto
Rican professionals working for large multinational corporations on
the island. 469 Moreover, U.S. tax experts have declared it to be the
cornerstone of a back-door bailout by the U.S. Treasury, as firms
paying the excise tax will simply offset their U.S. tax liabilities by
obtaining a foreign tax credit in an amount equal to the tax paid. 470 Of
residential purposes, in an amount equal to 100% of the amount of tax already
imposed pursuant to the regular property tax).
465. 2010 P.R. Laws No. 154, http://www.oslpr.org/download/en/2010/A-01542010.pdf.
466. Id.
467. See Sullivan, supra note 29 (describing the extension of the excise tax to 2017).
468. See, e.g., Julio Fuentes, New Excise Tax Undercuts Puerto Rican Business, ORLANDO
SENTINEL (Nov. 12, 2010), http://articles.orlandosentinel.com/2010-11-12/news/osed-law-154-puerto-rico-111210-20101111_1_excise-tax-new-tax-new-law (arguing that
the new excise tax is an added cost to doing business on the island and will create a
hostile tax environment).
469. See, e.g., Lafontaine, supra note 303, at 24041 (criticizing Act 154 as a threat
to the islands economic development).
470. See Sullivan, supra note 29 (explaining how a delay by the U.S. Treasury in

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course, the fact that Puerto Rican taxes are potentially creditable against
U.S. tax liabilities, rather than merely deductible, reflects an historical
and deliberate choice by the U.S. government to treat the possessions as
foreign nations rather than U.S. states for tax purposes. In any case, the
island has maintained the excise tax in the face of these criticisms,
thereby demonstrating that its tax laws are capable of withstanding
pressure from U.S. corporate interests and mainland journalists.
Finally, the Puerto Rican government has made it a priority to
build a solid foundation of local, Puerto Rican investment capital
through organic growth of the islands business, real estate, and
employment markets. In 2009, in an effort to rekindle the economy,
the government passed a comprehensive economic stimulus package,
funding the establishment of, among other things, a program to
secure loans for small and medium-sized businesses, 471 worker
retraining, 472 and homebuyer stimulus programs. 473 More recently,
the Commonwealth passed new tax legislation designed to attract
much-needed foreign capital to the island. 474 Puerto Rico Act 20 of
2012 offers a four percent corporate tax rate for Puerto Rican
businesses engaged in the exportation of services, 100% tax-exempt
dividends from earnings and profits relating to eligible export
services income, and generous permanent and temporary
exemptions from certain municipal taxes. 475
Under the companion Puerto Rico Act 22 of 2012, which was
intended to attract new investments in real estate and services while
obtaining much-needed capital infusions into Puerto Rican banks,
new bona fide residents of Puerto Rico are exempt from taxation on
dividends and interest income and on short- and long-term capital
gains. 476 To receive the tax benefits, individuals must be physically
present in Puerto Rico for at least 183 days of the year, and must not
have been a resident of the island for the fifteen years prior to the Acts
effective date. 477 Finally, Puerto Rico Act 273 of 2012 was passed in the

evaluating the excise tax has allowed corporations to claim it as a credit).


471. P.R. LAWS ANN. tit. 13, 148 (2013).
472. Id. 149.
473. Id. 145.
474. P.R. LAWS ANN. tit. 13, 1083144 (2012).
475. Id. 1083234.
476. 2012 P.R. Laws No. 22, http://www.oslpr.org/download/en/2012/A-00222012.pdf.
477. Id.; see also Philip DeMuth & Lauren Gensler, Treasure Island: Puerto Rico Bids to
Become New Age Tax Haven, FORBES, (Feb. 11, 2015), http://www.forbes.com/sites/
laurengensler/2015/02/11/puerto-rico-new-age-tax-haven.

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hopes of making Puerto Rico an international banking and financial


center by extending tax incentives for new banking and financial
operations on the island that serve clients outside of Puerto Rico. 478 The
new law offers a four percent income tax rate for any such qualifying
businesses. 479 To be sure, these incentives have been highly publicized
in U.S. mainstream media, with most such accounts declaring that the
island is choosing to become a tax haven for the wealthy. 480 While the
tax incentives are certainly very generous, the legislation appears to be
much more narrowly targeted than previous tax incentives, with the
more limited goal of increasing investment capital on the island.
As evidenced by the critical reactions of mainland commentators, it
often seems that Puerto Rico simply cannot win. When the
government reduces the taxes it imposes upon American investors, it
is accused of courting U.S. wealth by offering itself as a tax haven;
when it imposes new taxes upon the gains derived from foreign direct
investments on the island, it is accused of helping itself to a back-door
bailout, compliments of the U.S. Treasury. Both criticisms cast the
island as a danger to mainland economic interests. But history
reveals that allegations of this sort cannot be any farther from the
truth; in fact, Puerto Rico has spent more than one hundred years
catering to U.S. economic interests. Now the island must craft its
own economic path forward; this means that difficult tax and
economic decisions must be made, which will necessarily involve
trade-offs. As Puerto Rican lawmakers strive to use the political
process to construct a legitimate system of taxation, boost local
enterprise, and grow much-needed capital, Puerto Rico takes
important strides toward economic self-sufficiency. Through this

478. 2012 P.R. Laws No. 273, http://www.oslpr.org/download/en/2012/A0273-2012.pdf.


479. Id.
480. See, e.g., Lynnley Browning & Julie Creswell, Puerto Rico Creates Tax Shelters in
Appeal to the Rich, N.Y. TIMES (Mar. 25, 2013), http://dealbook.nytimes.com/
2013/03/25/puerto-rico-creates-tax-shelters-in-appeal-to-the-rich (Known for its
white-sand beaches and killer rums, Puerto Rico hopes to stake a new claim: tax
haven for the wealthy.); Elizabeth MacBride, The Billionaire Tax Move That Could Be
for You: Puerto Rico, FORBES (May 23, 2014), http://www.forbes.com/sites/
elizabethmacbride/2014/05/23/the-billionaire-tax-move-that-could-be-for-youpuerto-rico (quoting a billionaire hedge fund manager who called Puerto Rico the
Singapore of the Caribbean); Julie Satow, Puerto Rico Luring Buyers with Tax Breaks,
N.Y. TIMES (Sept. 5, 2014), http://www.nytimes.com/2014/09/07/realestate/puertorico-luring-buyers-with-tax-breaks.html (After a slow start, Puerto Ricos status as a
tax haven is beginning to catch on . . . .).

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process of rebuilding, Puerto Ricans might also come closer to


resolving unsettled questions regarding the islands political destiny.
III. A BROADER THEORY OF TAX IMPERIALISM: POSSIBLE FUTURE
APPLICATIONS, POINTS FOR FURTHER STUDY
This Article advances a theory of U.S. tax imperialism in Puerto
Rico, chronicling how the United States has used tax laws to advance
its own economic and political interests at the expense of its island
territory. To this end, this Article proffers an explanatory model that
breaks down the process of U.S. tax imperialism into three distinct
and readily identifiable historical stages. A detailed case study of
U.S.-Puerto Rican relations demonstrates how each of these stages
should be analyzed to better understand the ways in which historical
fiscal relations contribute to modern economic conditions.
While the theory of U.S. tax imperialism in Puerto Rico is key to
understanding the islands economic struggles, a more general
theory of tax imperialism is needed to understand other modern and
historical relationships between powerful nations and the taxing
jurisdictions they have dominated. Such a theory is likely to have
application far beyond the Caribbean.
A broader theory of tax imperialism would also make an important
contribution to the growing body of literature on tax havens and the
economic effects of tax competition among less developed nations. 481
As a case study, the U.S.-Puerto Rican story challenges the prevailing
view that tax havens are a distinct developmental strategy that could
have evolved only in the context of a robust international system of
statehood, respectful of the sovereign right of states to write their
own laws . . . . 482 To the contrary, modern tax havens may signal the
longstanding domination of more developed countries over the
taxing powers of less developed nations, territories, and possessions.

481. See generally RONEN PALAN ET AL., TAX HAVENS: HOW GLOBALIZATION REALLY
WORKS (2010). Interestingly, the authors identify three stages in the development of
tax havens, which correspond almost exactly to the three stages of U.S. tax imperialism
in Puerto Rico. Id. at 108. However, the authors focus upon the role of corporate and
financial laws rather than upon tax laws and colonial relations. Id. at 10717.
482. Ronen Palan, Policy Paper, HISTORY OF TAX HAVENS (2009),
http://www.historyandpolicy.org/policy-papers/papers/history-of-tax-havens; see also
Rosenzweig, supra note 397, at 98081 (acknowledging that more developed nations
unintentionally incentivized the establishment of tax havens, but also assuming that
tax haven countries made the independent choice to compete on the basis of tax
laws: specifically, they sell their jurisdictional sovereignty as a place to engage
in . . . transactions in exchange for minimal tax revenues).

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Of course, additional case studies are needed to determine whether


other alleged tax havens have experienced similar historical
interactions with more powerful taxing authorities.
Finally, a theory of tax imperialism is likely to engage in fascinating
ways with the so-called Lucas paradox, or the observation that
capital does not flow to less developed nations, as economic theory
suggests that it should. 483 In particular, while the initial stages of tax
imperialism might pave the way for capital to flow to developing
nations, the U.S.-Puerto Rico case study reveals that, ultimately, more
developed nations may have incentives in the modern global arena to
prevent large accumulations of capital in the very tax havens they have
created. Thus, a theory of tax imperialism is likely to reinforce the idea
that tax laws play a critical role in redirecting the flow of capital globally,
but they do so in ways that often privilege more immediate political and
strategic ends over longer-term economic efficiency goals.
CONCLUSION
In an influential essay entitled, How to Know the Puerto Ricans, Jess
Coln explained: [t]he first thing we must realize is that the Puerto
Ricans have been exploited for hundreds of years. That strangers
have been knocking at the door of the Puerto Rican nation for
centuries[,] always in search of something, to get something[,] or to take
away something from Puerto Ricans. 484 Because of this, when you come
to knock at the door of a Puerto Rican home you will be encountered by
this feeling in the Puerto Ricansometimes unconscious in himselfof
having been taken for a ride for centuries.485
Noted playwright Ren Marqus delved even deeper into the
national consciousness in his controversial book, The Docile Puerto
Rican. 486 After thoroughly indicting American imperial policies, he
turned his criticism inward, challenging the notion that Puerto
Ricans insulate themselves through their distrust of others: On
confronting the North American, the Puerto Rican for his part sets in
motion his colonial guilt complex.
In order to tolerate his
humiliating condition he has to find an excuse for it and admit that
483. See Robert E. Lucas, Jr., Why Doesnt Capital Flow from Rich to Poor
Countries?, 80 A M. E CON. REV. 92, 9296 (1990) (hypothesizing that human
capital reasons and political risk lead to the paradox where there is limited
investment by rich economies in poor economies).
484. Jess Coln, How to Know the Puerto Ricans, in A PUERTO RICAN IN NEW YORK
AND OTHER SKETCHES 147 (2002).
485. Id. at 148.
486. REN MARQUS, THE DOCILE PUERTO RICAN (1976).

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he is inferior to the North American. 487 This inferiority, he argues,


manifests in surrender and servility to American interests. 488
Distinguished author Esmeralda Santiago situated any such national
complex within centuries of military conquest:
We are told that our island doesnt have the rich heritage of bloody
struggles for independence that other countries do. The truth is, we
do have a history of struggle for independence, but the opposition
has always won. The failure of our best hopes for independence . . .
has caused many Puerto Ricans to simply give up. 489

These conceptions of weakness, subordination, and defeat have


been explored through more than a century of Puerto Rican political
philosophy, 490 poetry, 491 and other literary works, 492 as writers strive to
integrate past assaults and move forward as a stronger and more
unified nation. But there is also good reason to be optimistic. As
Justice Sonia Sotomayor recently explained with respect to her
Puerto Rican heritage, [t]here are strengths in our collective psyche
that account for our resilience and that equally hold the potential for
our renewal, if properly nourished and cultivated. 493
The same strugglesand thus the same opportunities for
nourishment and renewalexist in the fiscal and economic decisions
that Puerto Ricans must make today. History reveals that the original
architects of the islands system of taxation, as well as the proponents
of many federal tax policies that have shaped the Puerto Rican
economy, never had the islands best interests in mind. Rather, these
interlopers knocked on the doorindeed, knocked down the door
of the Puerto Rican nation to extract economic opportunities. They
left behind an ineffective fiscal foundation that has suspended the
487. Id. at 54.
488. Id. at 53.
489. Esmeralda Santiago, Island of Lost Causes, in BORICUAS, supra note 40, at 2224.
490. See, e.g., Bonilla, supra note 389, at 35861 (exploring Puerto Rican feelings
of defeat and inferiority).
491. See, e.g., Puerto Rican Obituary, in PEDRO PIETRI, PUERTO RICAN OBITUARY 111 (1973).
492. One writer captured the shame and humiliation of colonial rule through a
moving account of a young adolescent boy whose father passionately encourages him
to question U.S. imperial policies in their native Puerto Rico. When the boy later
refuses to salute the American flag at school, his father, in front of school officials,
sheepishly urges him to behave and respect authorities. ABRAHAM RODRIGUEZ, JR.,
THE BOY WITHOUT A FLAG: TALES OF THE SOUTH BRONX 1130 (1992). Boxing
champion and sports writer Jos Torres penned a heartfelt letter to Puerto Rican
youth, encouraging them to overcome their fears and not be ruled by other
peoples low expectations of [them]. Jos Torres, A Letter to a Child Like Me, in
BORICUAS, supra note 40, at 14.
493. SONIA SOTOMAYOR, MY BELOVED WORLD 151 (2013).

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island in a perpetual state of dependence, ensuring that it remains


docile and subservient to corporate interests that would exact an
overwhelming toll on the islands economic development.
The Commonwealth has made important strides in recent years.
Nevertheless, the most immediate and pressing issue facing the island
continues to be that of economic self-determination and, in
particular, fiscal self-sufficiency. A strong fiscal foundation is
essential because, as French economist Thomas Piketty observed in
his landmark work on wealth inequality, [w]ithout taxes, society has
no common destiny, and collective action is impossible. . . . At the
heart of every major political upheaval lies a fiscal revolution.494
Thus, the broader question remains: what is the path forward for
Puerto Rico? In light of the history recounted here, answers are
unlikely to be found in treatises narrowly focused on technical
matters of tax policy and municipal finance. Nor will they be
discovered through myopic fixation on the perennial question of
statehood, independence, or preservation of the political status
quo. 495 In striving to overcome its past, Puerto Rico must dig deeply
within its national consciousness and continue to identify its social,
political, and economic priorities, thereby constructing a fiscal
architecture that best serves these ends.
This is no easy task, but the enduring works of the Puerto Rican
writers, philosophers, poets, and other cherished public figures who
have been cited throughout this Articlethose who have carried and
nurtured the islands heritage in the face of continual imperialist
assaultsoffer valuable words of wisdom. As poet Jos de Diego
widely regarded as the Father of the Puerto Rican Independence
Movementpenned, [d]o as the bull in the face of adversity: charge
with confident power. 496 This advice applies with equal force to the
decisions Puerto Rico must make in regards to its fiscal policies going
forward. There is much work to be done, but the future is hopeful.

494. PIKETTY, supra note 253, at 493.


495. Of course, there are important reasons for this status-driven mindset. As
one author recently explained, [t]o speak of Puerto Rican political discourse is to
speak about the question of status. No other topic comes close to its importance.
Juan Pablo Carro, Deconstructing Sovereignty: The Validity of the Status-Driven Mindset as
Seen Through Soberanas Exitosas: Seis Modelos Para el Desarrollo Econmico de Puerto Rico
by ngel Collado Schwarz, 80 REV. JUR. U. P.R. 439, 439 (2011) (footnote omitted).
496. Jos de Diego, To the Persecuted, in BORICUAS, supra note 40, at 7.

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